Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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..................................... 24 Figure 5: Canadian Retail Outlet Population .................................................................................................................Regional & Urban Groupings.......... 49 Figure 26: Outlet Revenues................................................................................................................. Pump Price (nominal ¢/litre).............. 47 Figure 24: Outlet Volume vs........ 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)............................Price History............................................Selected Goods & Services ...................................... 24 Figure 6: 1995 Retail Outlets by Province ..................................................................... 28 Figure 8: Outlet Representation by Service ..................Price History ..........................................................................................Price History..... Gross Product Margin ......................................Regular Unleaded ...................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ........................List of Figures Figure 1: Pump Price / Margin Model...... 63 Figure 34: Montreal ..................... 35 Figure 16: Monthly Demand vs............................................................................................................................ 62 Figure 33: Ottawa ......................................................................................................................................... 50 Figure 27: Victoria .. 44 Figure 21: Gross Marketing Margin Elements ............................................................ 25 Figure 7: Outlet Representation by Mode...... Income............................................ 69 Figure 36: Halifax .........................................Price History ...... 36 Figure 17: Study Market Methodology ..................................................................................................... 53 Figure 28: Vancouver .............. 66 Figure 35: Saint John NB ........................................................................................................Price History..............................................Price History ................. 16 Figure 3: 1996 Average Regular Gasoline Margins (56.................................... 57 Figure 31: Winnipeg ..... 71 MJ ERVIN & ASSOCIATES i .................... 70 Figure 37: Charlottetown ....................................................................................................................................................Price History.......................................................... 58 Figure 32: Toronto ..................... 34 Figure 15: Monthly Rack Prices: Selected Markets .......Price History ......... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.............. 42 Figure 19: Pump Price ........................................................................................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ............... 4 Figure 2: 1996 Average Prices/Margins ................................................. 46 Figure 23: Average Annual Throughput per Outlet...................................Selected Centres .... 56 Figure 30: Regina ............................................ 30 Figure 10: CPI Index Comparison ... 48 Figure 25: Outlet / Volume Relationship ......... 33 Figure 13: Monthly Gross Marketing Margins................................ 43 Figure 20: Ex-Tax Pump Price Elements ........................ ex-tax elements .............Price History...................................................................tax............... 40 Figure 18: 1995 Average "Blended" Pump Price ......................1988-1995 .............................................8¢ Pump Price) .....Price History ................................................ Costs.............................. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) .............................. 54 Figure 29: Calgary ............................................................................................................................................................... 45 Figure 22: Petroleum Gross Product Margins ....................Price History .....................

............................................ 13 Table 2: Taxes on Regular Gasoline on December 31............................................................ 51 MJ ERVIN & ASSOCIATES ii .......................................................List of Tables Table 1: Downstream Sales Channels .......... 15 Table 3: Selected Study Markets ......... 1996 ........................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue..............................................

This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs.1 ¢ 5. 1996 Average Prices and Margins .2 ¢ 24. and a foundation for effective policy development. This study. together with a separate review of the refining sector.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. dealer income.5 cents per litre on the sale of regular gasoline in a typical major urban market. and the Canadian Petroleum Products Institute (CPPI). This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. These prices are determined in a competitive marketplace. and ex-tax pump prices. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.8 ¢ TAX 28. each with unique MJ ERVIN & ASSOCIATES iii .5 ¢ 0. Natural Resources Canada (NRCan). represented by crude. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. Price competition occurs at three distinct levels in this industry.4 ¢ 19.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. the Canadian retail marketing sector realized an average gross product margin of 3.3 ¢ 28. supplier costs and profitability. rack.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.

and accordingly. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. The resultant margins are therefore a reflection of the state of product supply.000 in 1989. Convenience store. and the traditional automotive service bay. this study focuses on the retail gasoline sector. nine of the past ten years. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI).500 retail outlets were in operation in Canada in 1995. well over half of all outlets in Canada operate as lessees or independents. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet.dynamics. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. From 1986 to 1995. Approximately 16. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Dealers have a variety of relationships with their supplier. demand and other competitive factors existing at the time. compared to about 22. due to its prominence in the public and media domain. and declined by 10 cents per litre measured in constant dollars. car wash. While each of these marketing channels operates in a competitive environment. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). which potentially allow for reduced margins at the gasoline pump. are examples of ways in which outlet petroleum sales are augmented by other revenues.

while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. This has both resulted in. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. From 1991 to 1996.crude) 5¢ Marketing Margin (retail . and has been a result of several factors including: • • • improved refinery utilization and efficiency. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. As a result of these trends. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. as a consequence of refinery plant rationalization (closures) and a modest demand increase.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991.The “tax-included” nominal pump price increased over this same period. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . MJ ERVIN & ASSOCIATES v . however.

When petroleum gross product margins were compared to their corresponding outlet throughputs. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. several “outside variables” (product taxes. With few exceptions. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput.Comparison of Canada. and one by one. wholesale product cost and freight charges) were isolated from the pump price. This was integrated with selected NRCan price data. rural markets. were selected for a detailed review of outlet economics. but also had significantly higher throughputs per outlet. to derive 1995 average petroleum gross product margins for each of the 19 markets. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. This provided for market-bymarket and regional comparisons of key competitiveness indicators. A wide range of petroleum gross product margins were evident. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. That such a relationship should exist was not surprising. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. With the participation of several CPPI member companies. MJ ERVIN & ASSOCIATES vi . 19 markets representing a broad range of conditions. although this study provides an independent confirmation of this. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study.

6624 1. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. the residual revenue is available as profit to be re-invested into retail operations. etc. and his personal labour investment. of which gross product margin and throughput are only two of several factors. corporate charity.962 R2 = 0. Consequently.000. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. which reflects his investment in the outlet.000. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000. These costs would include salaries of marketing representatives and management.000 2. This study showed that an average outlet net revenue in the 19-market study group was about $70.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.000. brand advertising. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000 3. smaller markets.000.6634Ln(x) + 76. an additional goal of this study was to undertake a comparison of outlet profitabilities.000 5.000.000 6. sales processing. and/or distributed to shareholders.000.000 Volume (litres) 4. supplier profit: after the above costs are allocated. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. revenues from ancillary operations (eg: convenience store. not poor competition. head office and regional office overheads. and in major vs.• Smaller markets performed as competitively as larger centres.

$154. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. Average Outlet Income (before marketing overhead costs) BC/PR $300.market study group.000 $150. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000) $(150.000 $50.000 per year. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000) $(250. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. 1. Despite this difference. by all objective measures available to this study. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. and that petroleum sales revenues alone.000) $(300.000) $(100. distant outlets are clearly higher than those associated with concentrated urban markets. $61. The Canadian retail petroleum products industry. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .000 $200.000 $100. Although an objective measure of competitiveness is elusive. were insufficient to cover outlet costs. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. after allowing for estimated dealer profit and supplier overhead.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. at 1995 prices. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000) $(200. suppliers likely incurred a net loss on outlet operations in 1995.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions.000 $250. respectively. for which this study had no specific data.000) $(350.000 vs.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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x

driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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A wide range of petroleum gross product margins were evident within the 19market study group. serve as perhaps the most significant indicators of competitiveness in the downstream industry. While these economics might appear to place this industry in a position of poor viability. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. although this study provides comprehensive evidence of this. Nevertheless. if Canadian average pump prices were only one cent higher than they were in 1995. When plotted against the margin-volume model. despite the predisposition of many observers to use them as such. and the associated industry initiatives which are ongoing in nature. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). virtually all of the 19 study markets exhibited similar levels of competition. When these margins were compared to their corresponding outlet throughputs. this industry sector would have realized profits of unprecedented proportions. Also. most outlets used in the 19-market study represent major integrated oil companies. assuming all other costs were unchanged. based upon an assumed posted rack price. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. in the long term these fluctuations are likely more reflective of market restorations. these findings clearly show that pump price increases are ultimately linked not to increased profits. Thus. had petroleum margins which were commensurate with average outlet throughput for that market. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. not excessive profits. Thus. most markets. Thus. crude costs. but to increases in underlying rack prices. 7.• • • improving production efficiency through refinery plant rationalizations (closures). Indeed. That such a relationship should exist was not surprising. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Also. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. 8. Industry profitability is extremely sensitive to very small changes in pump price. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . regardless of size. and in turn. Both the downward trend in margins. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Outlet throughput is a key determinant of inter-market pump price differences.

This created some economic pressure to sell product at a higher pump price. in order to build upon the findings in this study towards a full understanding of the dynamics at work. and this study showed that gasoline prices were no exception. • • At first glance. more isolated markets are generally higher than in larger centres. it would seem that if local government in smaller markets were interested in lowering pump prices. isolated markets face particular challenges: although found to be highly competitive. average pump prices were relatively high. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. 9. the solution would be to encourage some dealers to exit the market. MJ ERVIN & ASSOCIATES xiii . Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). there are three points to consider: • • In very small markets. which could actually inhibit competition. While competitiveness in most smaller markets was shown to be as active as in larger centres. A full-serve retail gasoline outlet typically employs 3-5 staff. Smaller. according to the margin-volume model.5 million fewer litres of gasoline than a group A (major centre) station. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. reducing the number of outlets may also reduce the number of competitors. The costs of most consumer goods in smaller. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities.product margins than larger markets. reduce pump prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites. which should. The loss of employment represented by a station closure may be of some concern to smaller communities. other factors exist which contribute to relatively high margins and prices. In suggesting this approach however. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. poor outlet throughputs were generally the predominant factor. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study.

Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). and as such. has seen a decline in pump prices relative to other Canadian markets. MJ ERVIN & ASSOCIATES xiv . Convenience store. and the traditional automotive service bay. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation.10. as it does in the Canadian petroleum marketing sector. Charlottetown. characterized by narrow product margins and relatively flat pump prices. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). possibly to the detriment of the consumer. many national and local environmental regulations exist for good cause. is both the cause and consequence of increased activity in ancillary operations. and in turn. the degree of price competition in the retail petroleum has in effect. and likely others in Nova Scotia. This competition then. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. As these findings show. will likely preserve a highly competitive petroleum market. is well beyond the scope of this study. 11. car wash. are an acceptable limitation on pure competition (Finding 8). is viewed as an agency which exists to the benefit of industry and consumer alike. does not appear to benefit in consumer terms. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. Also. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. Retail ancillary operations are a critical element of petroleum price competition. This study proposes rather. the Halifax market. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. The federal Competition Bureau for example. The historical record is clear however: since deregulating pump prices. direct regulatory interventions may have an adverse effect on competitiveness. and the perceived effect on their markets. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. that where a healthy competitive climate exists. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. sometimes below that of outlet operating costs. as marketers find even more innovative ways to attract market share. depressed petroleum revenues. under the current PEI regulatory structure.

A regular comprehensive competitiveness evaluation. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. in a simple format designed for consumers and legislators. Develop cooperative industry research into marketing sector competitiveness issues. and the nature of competitiveness influences. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. This should be in the form of a quarterly summary of price trends and related measurements. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. along the lines of the model used in this study. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. using Canadian and foreign selected markets. margins and competitiveness factors. and the converse image held in much of the public domain. Public perception measurement. • • MJ ERVIN & ASSOCIATES xv . A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. using Canadian and foreign selected markets. 2.1. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. petroleum marketing competitiveness. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. not inhibit. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. Improve public understanding and awareness of competition in the petroleum marketing sector.

A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. • * * * Better understanding of this industry. consumers. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. MJ ERVIN & ASSOCIATES xvi . the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and in particular. using Canadian and foreign selected markets. by industry. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and issues/opportunities facing such markets. and regulators alike.

.to help the industry cope and to enhance competitiveness... and . region by region across Canada. which comprise the “downstream” oil industry. and MJ Ervin & Associates was selected to undertake the “rack to retail”.. leading to more effective policies and reduced uncertainty for future investment.” MJ ERVIN & ASSOCIATES 1 . or even communities within the same region... The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry.to draw comparisons with nearby USA markets.to provide a sound database upon which more effective policy decisions can be made. to name a few. . more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. Project Objectives The working group established as the primary objective of this study “.. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.Introduction Background Canada’s petroleum refining and marketing sectors. and in the process... face a number of challenges: a poor public image. competitive pressures from US and offshore refiners. In 1995. and regional differences which face the petroleum products retail industry.. . The SCF laid the foundation for supplementary studies.to determine the key factors which drive competitiveness in specific markets. A working group represented by Natural Resources Canada (NRCan)..to analyze the rack to retail market and the market structure for refined petroleum products. and Industry Canada was convened to undertake this project. including a regional. the Canadian Petroleum Products Institute (CPPI).” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. and in comparison to the Canadian national average and nearby USA markets”. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. and a challenging array of potential environmental initiatives. or petroleum marketing portion of the study. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions.to better understand the competitive opportunities and challenges. and that issues and challenges be identified so that conclusions and recommendations can be made “.. Specific purposes of this study would be: • • • • “.

The study meets these objectives. Unless otherwise stated. or which have a specific meaning in the context of this report. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . and a foundation for effective policy development. Findings are stated in bold and are summarized in part E of this report. Ultimately. presents conclusions and recommendations which arise from the study findings. Part D: Selected Market Study presents the findings of a diverse 19-market study. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. due to the considerable data gathering difficulties that such an approach would entail. Specific comparisons of specific Canadian and US consumer markets were not made. and in order to provide insights into the range of competitive dynamics that can exist. and the effect of competitiveness on each subsector. • Part E: Conclusions and Recommendations summarizes the study findings and. from which some important findings are made. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Many of the findings in this report are presented in graphical form. Part C: Historical Trend Analysis provides an overview of prices. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. The study does provide comparisons with US markets on a national level of detail. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. It also relates consumer demand patterns to pump price fluctuations. margins and demand patterns over the past several years. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. through a multi-faceted approach. in Appendix I. Supporting data to these charts can be found in Appendix II. undertaken as part of this project to: • make a more detailed examination of price.

Petro-Canada.• Industry Canada.. Shell Canada. Consumers Association of Canada. Finally. Ministère des ressources naturelles du Québec. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study.. and Shell Canada. through Maureen Monaghan and Huguette Montcalm. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). facilitated some of the data gathering needs of this study. CPPI. through Bob Clapp. We gratefully acknowledge these companies. NRCan. chaired the steering committee. and provided critical guidance and feedback at several key stages in the process. Natural Resources Canada. Petro-Canada. Ontario Ministry of Environment and Energy. assisted in securing the support and participation of member companies in the selected markets phase of the study. Suncor Inc. The Canadian Petroleum Products Institute. and Industry Canada.. Imperial Oil Ltd. including Ultramar Canada. and their 481 retail associates whose outlet data was used in our analysis. Environment Canada. for their assistance. Suncor Inc. These included: Canadian Tire Petroleum. MJ ERVIN & ASSOCIATES 3 . • • Several organizations participated in two key review sessions.. and also participated in the steering committee.

texture.price . The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. as this study shows. most Canadians relate to this industry in one specific way: as consumers. Yet. principally of motor gasoline. And. In fact. but simply. It is this particular feature of petroleum products . multifaceted industry. and serves to explain several factors that together determine retail gasoline prices at any given time. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. or taste. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. the particular quality of gasoline which is of most interest to consumers is not its colour. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. unlike many consumer products. as they are in Figure 1. its price. These relationships can be modeled. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 .Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast.which is used by many groups and individuals to assess the competitiveness of the petroleum industry.

this study’s use of the term relates to gross margin. objective measurement for competitiveness. this study examines competitiveness from the latter. MJ ERVIN & ASSOCIATES 5 . consumer perspective. it is important to define the term “margin”. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. (implying that the stated margin represents net income or “profit”). is more likely to equate the term with “value for money”. From an industry perspective. an understanding of the term itself is necessary. “competitive” may be synonymous with “viable”. Ultimately however. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. While this term is often associated with the phrase “profit margin”. evaluating competitiveness is therefore a partly subjective process.or margin . Each margin is quantified by its defining prices. A consumer however. Gross margin is simply the difference between two price points. gross margin represents revenue only. and in fact inextricably related.Many of the terms introduced and explained in this section are used extensively throughout this study. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. So defined. While both perspectives are valid. these stakeholder revenues are derived from the revenue from the retail sale. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). each essentially taking a share1 . any operating expenses must then be considered before making any determination of profits. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. margins are squeezed or expanded accordingly. Before examining each of the model elements.from the total pump revenue. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down.

such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. 1986: “Competition may mean very different things to different people. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. The actions by business rivals place an upper limit on the prices a firm can charge for its products. provide some means for comparing the type and to some extent. This study therefore attempts simply to identify and illustrate competitiveness indicators which together.. the degree of competition within a market. represents a process by which prices are set. as competitors seek to attract market share through lower prices. An effective functioning of markets also permits smaller competitors to expand if they meet the test. Conditions for a competitive market can be deemed to exist when: • • more than one. Since a competitive market effectively limits the price option. More importantly. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. if market conditions allow a sufficient number of players to remain profitably engaged. Accordingly. the result of price competition is reduced profit.” Price Competition in the Oil Industry In order to assess competitiveness. Price competition.Unlike many business or economic concepts. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. or in other words. and the entry of new competitors and new ideas. Simply put. and ideally many entities offer the same or similar products (brand variety). and unless care is taken to use the word precisely.. in the sense in which it is something in the public interest. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors.” “. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. this usually requires a reasonable number of competitors. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). Competition can only be sustained therefore. Inevitably. in order to maintain some level of brand variety.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. improving efficiencies. it can frustrate communication and obscure analysis. a universally acceptable definition of competitiveness is elusive. competitors can either restore higher prices or reduce costs. Technological change and innovation are the large levers of competition in industry. To achieve this. reducing costs. one must ask how marketers compete. is the only real option in the long term.

Within the broad context of the oil industry. which in turn defines the margins. whose main 1 E. Price. Nevertheless. and in retail markets. Place. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations.the variables at their disposal. MJ ERVIN & ASSOCIATES 7 . and are generally known as integrated oil companies. or four P’s: Product. 1971). Basic Marketing: A Managerial Approach. some organizations have operations in two or more of these markets. (Homewood. Given the commodity nature of petroleum products. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. In fact. commonly known as the “marketing mix”1.44 (1st Dec. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. the most effective of these as a competitive tool is price. and as will become more evident in this study. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. the “oil industry” consists of two distinct industries: the upstream industry. the raw material from which gasoline is made. whose main activity is the exploration and development of crude oil. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. p. The dynamics of upstream and refiner competition are major studies in themselves. is false. the geographic scale of competition is an important consideration. in rack markets. most Canadians relate more in terms of retail gasoline marketing. A refiner in Toronto may well compete with a refiner in Buffalo. Ill. Jerome McCarthy. It is also important to stress that the market ultimately sets rack and retail pump prices.. which in turn defines a proper market price. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. Irving.: Richard D. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. and the downstream industry. • Thus described. so a brief description of these. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. competition in the crude and rack markets deserves some mention. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. and Promotion. and are beyond the scope of this study. 1960) 2 Although distinct. New York. particularly in the crude (upstream) industry and refiner sector. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. The converse notion that the industry establishes a “should be” margin. 4th Ed.

a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. In providing historical comparisons of crude to rack/pump prices. Although this industry is not the focus of this study. and in the open market structure that exists in Canada.activity is the refining of crude oil into petroleum products. from the exploration for potential crude or gas reserves. which finds and produces crude oil . in several commodities trading centres around the world. production. it is important to examine its relationship with its neighboring downstream industry. Infrastructure The upstream oil industry encompasses a broad range of operations. Within the scope of this study. Crude oil is a commodity which is traded in a global marketplace. MJ ERVIN & ASSOCIATES 8 . Canadian producers must compete to sell their production to refiners. alongside major producing countries such as Saudi Arabia.the raw material from which gasoline is made. implying that it fluctuates. which gives an accurate portrayal of month-to-month crude price fluctuations. it is probably sufficient to say that. its marketing operations). our crude prices rise and fall according to price benchmarks established far beyond our own shores. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. and refinery production methods. While this study focuses on the downstream industry (and in particular. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. that is to say. due to variables such as crude quality. drilling. rather than a fixed value. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. Canadian producers are known as “price takers” rather than “price setters” of crude prices. as a minor contributor to the world crude supply. Canadian producers have virtually no influence over world crude prices. gasoline grade. consequently. which it does on a continuous basis. The upstream industry’s crude price is represented in Figure 1 as elastic. and transportation of crude oil to the refinery plant. and the delivery and sale of these products to the consumer.

and from this feedstock. day-to-day plant operations are cost-intensive. diesel. From this revenue. and hopefully realize some production. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. or roughly 34 percent of the pump price. As a general measure: Finding 2: 1996 average crude price. buy refined products from the refiner and sell them to the end-use customer. in the petroleum sector.While some suggest that the price of gasoline should rise and fall exactly with the crude price.1 cents per litre. A modern refinery is a sophisticated work of engineering. manufactures a range of refined petroleum products including gasolines. In addition. This sector acquires crude oil. which in oil producing provinces such as Alberta. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. is the provincial government. MJ ERVIN & ASSOCIATES 9 . who manufacture petroleum products from crude oil. and some attention to the refiner sector is therefore given here. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. and pay out royalties to the resource owner. its predominant feature is the plant facility which. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. maintenance. was 19. put simply. is called the refinery. involving energy. as a factor of the regular gasoline retail pump price. crude is only one of several factors that influence pump prices. drill for. oil producers must explore for potential reserves. and marketers who. personnel. and lubricants. The focus of this study is on the marketing sector of the downstream petroleum industry. and numerous safety and environmental safeguards. As is typical of many manufacturing organizations. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. heating fuels.

being squeezed or expanded between these two price points. since the market-driven rack price provides an objective. In fact the refiner typically pays a higher price than the benchmark crude price. For a competitive rack market to exist. which can be broadly categorized as follows1: • • • rack price .this is the “internal” price charged by a refiner to the marketing arm of the same company. some clear competitiveness indicators exist. and a return on the considerable capital investment in the plant facility. many of which do not have integral refineries. but with no material effect upon the Gross Product Margin derivation. the gross refiner margin is the price at which the refiner sells its refined product. there would be little or no market-driven competitiveness in the refiner sector. as they relate to negotiated. the relative competitive strength of any given rack market is difficult to assess. transfer price . refiners sell their product under a variety of arrangements. not the refiner sector.the price charged for immediate supply on an “as available” basis. While refineries are always rack price points. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. which provides an independent and objective determination of rack-based gross refiner margin. Although contract and transfer prices are distinct from rack price. The existence of rack price in a given market is not of itself. the gross refiner margin is elastic. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. reflecting the cost of transporting the crude from the producing region to the refinery plant. as this price point exists within the marketing sector. For simplicity. Wholesale volume data is not readily available on a market-specific basis.Price/Margin Model Elements For simplicity. this model only uses the benchmark crude value. confidential terms between the seller and specific buyers.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. external measurement of the current market value of a particular petroleum product. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. Since both crude and rack prices fluctuate according to market forces. contract price . representing major Canadian population centres. which may cause Gross Refiner Margin to be slightly overstated. 1 Dealer Price is not included here. they use rack price as their basis. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. In fact. indicative of a competitive wholesale rack market. less the price at which it bought its raw material2 (rack price minus crude price). only rack price information is readily available in the public domain. This margin provides for plant operating costs as described above. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. and accordingly. In simple terms. Of these three refiner prices. Contract and transfer prices are not openly shared. If for example. On a national basis however. 2 MJ ERVIN & ASSOCIATES 10 .

due to the relatively small transportation cost. In practice. Canadian refiners must therefore be price competitive not only with each other. In examining the structure of the Canadian refiner sector. but with their US and European counterparts. 1 Based on Octane Magazine Retail Outlet Survey data. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. this limits a marketer to a relatively short range (perhaps 1. or close to.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure .000 km) for overland truck transport. but where pipeline or marine fuel terminal facilities exist. Integrated Refiner-Marketers In Canada. the question of the internal selling price. In practical terms. who compete for a share of this demand. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. MJ ERVIN & ASSOCIATES 11 . to major industrial consumers. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. The mechanisms that drive rack prices are more fully discussed on page 36. and which supply petroleum to about one-third of all retail outlets in Canada1. as there is no obvious market mechanism to regulate its setting. and in the case of gasoline. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. who themselves do not refine petroleum products. to so-called “independent” petroleum marketers. in order to maintain realistic accountabilities within each of the two sub-sectors. from any one of several regional refiners. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. integrated refiner-marketers establish transfer prices at. even overseas. market-driven Rack (wholesale) pricing of petroleum products. market-driven rack prices. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). but at the expense of marketing income. As shown in Figure 15 (page 35). wholesale refined product is bought and sold across very large distances. most refiners also participate in the marketing and retailing of petroleum products. for example. petrochemical producers. potential sources of wholesale product supply for most Canadian non-refiner marketers. would produce better than expected refiner income. or transfer price.for example. In these cases of so-called “integrated” refiner-marketers. arises. many US and European refineries are in practice.

as a popular and relevant “window” on the petroleum marketing sector. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. It is this sector which has direct contact with the petroleum consumer and it is this sector. including mining.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. principally into commercial trucking operators’ vehicles. which “sets” the retail price of gasoline. or in the case of cardlock facilities. in the minds of many consumers. Marketing operations within this sector can be broadly classified into three elements. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. the most recognized element of the downstream oil industry. and purchase at or near the established rack price. media and regulatory attention. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. Wholesale Sales to a wide variety of customers. Within this industry sector. each with its own distinct infrastructure. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. and aviation. • • MJ ERVIN & ASSOCIATES 12 . product is sold from a central facility. farming. gasoline price and competitiveness issues attract considerable public. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. trucking. and who essentially deal directly with the refiner. For this reason. home heating. Retail Sales to the domestic motorist.

heating fuel delivery is an integral part of a bulk sales outlet. to the motorist consumer. These outlets usually have considerable inventory capacity. typically at the “rack point”. as principal elements of petroleum marketing operations. at a negotiated contract price. which is generally less than the rack price. using delivery tank trucks.300 bulk sales outlets in Canada. by delivery tank truck. There are over 1. MJ ERVIN & ASSOCIATES 13 . Sales of petroleum products (principally gasoline) through retail gasoline outlets. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts.500 retail gasoline outlets in Canada. Sales to non-refiner petroleum marketers. one final element of the pump price model must be reviewed. There are about 16. and regular gasoline in particular. for example. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Before examining this sector in detail. In major centres dedicated Home Heat centres provide this service. such as product transport and/or storage. Sales of aviation fuels at major and secondary airports across Canada. There are over 850 cardlock outlets in Canada. Sales to major industrial accounts. in smaller centres. according to the contractual relationship between the supplier and the dealer. Sales to spot buyers at posted rack price. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. Sales of home heating fuels to residential furnace oil customers. Retail outlets are operated in a variety of modes. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales of petroleum products through bulk sales outlets. as discussed. and usually supply customers by delivery to the customer’s own storage tank. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Sales to commercial and industrial accounts by the wholesale marketing sector. often delivered by pipeline or ship/barge. Direct sales generally do not involve any marketing sector infrastructure. usually involving some aspect of the marketing sector infrastructure. to the aviation fuel consumer.

A three-cent drop in pump price. If the pump price decreases for example. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. As part C of this study shows.6 cents per litre (Canada 1996 10-city average). in a small number of markets. 1 Due to the application of GST (and in Quebec. would include a roughly 0. municipal taxes. typically made up of: • • • • a ten cent per litre federal excise tax. which amount to 28. MJ ERVIN & ASSOCIATES 14 . the tax content of retail gasoline in Canada has increased steadily over several years. stable amount. provincial sales tax.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. and seven percent GST. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. regardless of market conditions. or roughly 50 per cent of the pump price. Table 2 shows the provincial tax content for retail gasoline.2 cent (0.3 in Quebec) drop in the tax content. PST). for example. the tax content of the petroleum price is essentially a pre-determined. tax content does fluctuate somewhat with pump price changes. The petroleum industry acts as a collector of these taxes.

2 24.8 note 1 note 2 An additional tax of 1.6 25.3 Federal Excise Tax 10.5 3. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 11. MJ ERVIN & ASSOCIATES 15 .0 9.0 10.6 3.0 10.1 25.0 14.8 4.6 3.0 cents is charged in the greater Victoria and Vancouver areas respectively.6 22.3 20.0 10.3 10. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 10.0 GST content (7% of pump) 3.5 Total Tax 24.0 16.4 3.5 cents and 4. An additional pump tax of 1.0 10.2 24.0 3.2 10.Table 2: Taxes on Regular Gasoline on December 31.0 10.1 32.5 6.7 3.0 10.7 30.0 28.2 cent per litre pump tax.5 14. Provincial Tax 11.5% sales tax applied to the GST-inclusive pump price.0 10.0 15.0 10.0 10.7 13.3 27. plus a 6.0 4. All Quebec gasoline sales are subject to a 15.0 27.0 10.7 18.9 3.5 cents was introduced in the Montreal and surrounding area in 1996.0 10.6 3.0 3.5 12.6 3.0 28.

and the retail gasoline sub-sector in particular. to derive a representative value for regular gasoline gross product margin in Canada.4 ¢ 19.5 cents per litre (after freight cost). MJ ERVIN & ASSOCIATES 16 . Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. and potentially. some profit return for the shareholder. or 9 percent. Upstream operations realized 19.6 cents per litre. and ancillary operations.1 cents per litre.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.2 ¢ 24. It also provides an overview of the industry in terms of several infrastructure parameters.3 cents per litre. was available for product marketing operations. The residual. operating modes. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).8 ¢ TAX 28. Figure 2: 1996 Average Prices/Margins . Refiner operations realized 5. including retail outlet distribution. namely the dealer’s costs and income. the brand supplier’s costs.3 percent of the average regular gasoline posted pump price.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. This 1 Prices and margins reflect a Canadian 10 city average. this section provides a view of the Canadian petroleum marketing sector.5 ¢ 0. based on regular unleaded gasoline. or 34 percent of the pump price.1 ¢ 5. or 50.3 ¢ 28. 3.

gross product margin represented 6 percent of the Canadian average regular gasoline pump price. The gross marketing margin. Freight cost does not typically fluctuate. was 5. Based on the 1996 data. and is often out-sourced to third-party common carriers. this is seen as a “non-core” business. See page 10 for further explanation. and it is depicted in Figure 1 as a fixed cost element. and is then transported to the retail outlet.3 cents per litre. Although many petroleum marketers conduct their own freight operations. Bloomberg rack price values were used as the assumed wholesale price. for example) is sold/transferred at the current rack or transfer price. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. or “rack to retail” margin.5 cents per litre. the finished product (gasoline. Both refiner and marketing margins have been in decline over the past several years. is the second of two elements of the downstream oil industry. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. petroleum taxes accounted for 50. The marketing sector then. In 1996. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. is defined by the marketdriven price points of ex-tax pump price. and rack price. As the product leaves the refinery plant. In referring to marketing margins and product margins. which in the case of retail gasoline. In 1996. Freight MJ ERVIN & ASSOCIATES 17 . as part C will describe. three key findings can be stated: Finding 4: Finding 5: In 1996.3 percent of the average urban price of regular gasoline in Canada. it falls into the domain of the marketing sector. is usually the gas station. was 3.

3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. storing and dispensing a product such as gasoline adds considerably to the operating cost. as it excludes the “outside variables” of tax. • Product sales: Within this domain. Gross product margin is therefore defined as gross marketing margin less freight cost.5 cents per litre in 1996. typical of any retail business. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). rural markets experience higher pump prices than do larger centres. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . This is a particularly useful measurement in comparing retail gasoline markets.6¢ Refiner Operations 5. Posted pump price includes all of these variables. Unlike most other retail enterprises however. an average gross product margin for regular gasoline in a major Canadian city was 3. incur a variety of costs.000 per outlet. which are typically close to a wholesale rack point.1¢ Tax 28. but at an average cost of over $200. As represented in Figure 3. Figure 3: 1996 Average Regular Gasoline Margins (56. petroleum marketers. together with gas station dealers. and upstream/refiner margins.8¢ Pump Price) Upstream Operations 19. and is therefore a poor comparative tool. freight.costs are generally less than one-half cent per litre in most major Canadian cities.5¢ Product Operations Freight 0.3¢ 3. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. as it represents 80% of all retail gasoline sales.

as gas stations proliferated.retail gasoline sales respectively1. seasonal blends. Higher octane grades are more expensive than RUL. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. Place. p. Price. 1 Diesel is another petroleum product sold at many retail outlets. but in 1995 was typically 5 cents per litre for midgrade. expanded product/services offerings such as convenience items. The grade differential varies somewhat from city to city. or when comparing price levels between markets. Place Typically.44 (1st Dec. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. additives. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Price competition has forced marketers to optimize outlet revenue. • Product In the past decade. but most consumers view gasoline as a commodity. (Homewood. and the price difference between these grades and the RUL price is referred to as the grade differential.. gasoline). page 24). and accordingly. marketers compete to be represented in as many and/or the best locations as possible. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. This study does not examine such a broad issue however. competitive strategy of this type focuses heavily on selecting the best place. RUL prices are therefore most often cited when relating historical price trends. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Today. Ill. one must ask how marketers compete. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. 1971).: Richard D. Basic Marketing: A Managerial Approach. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. Irving. will ultimately purchase based on price. Jerome McCarthy.” or four P’s: Product. commonly known as the “marketing mix2. a number of factors preclude this type of strategy. and Promotion. In order to measure competitiveness. it represents a very small percentage of total retail petroleum sales.). Simply put. 2 E. marketers have attempted with some success to differentiate their product offerings from other brands. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. 1960) MJ ERVIN & ASSOCIATES 19 . rather than the most places. A portion of the market certainly responds to this type of competitive strategy. 4th Ed. Although revenue from this product is factored into the study market economics in Part D. Today. propane vs. etc. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. and 9 cents per litre for premium gasoline. marketers compete for the consumer’s choice of transportation energy (for example.

As such. is less clear. and therefore “trades” within a relatively narrow price range.contrary to some public perception. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. and more importantly. free item with purchase or special price item with purchase. Examples of promotional competition are: • • • brand identity gasoline discount coupon. uniform prices . their subsector margins. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. Establishing an objective measurement of price as a competitiveness indicator however.• • closure of non-viable outlets. price clearly remains the predominant competitive tool used by Canadian gasoline marketers.while uniform pump prices are sometimes cited as evidence of industry collusion. fluctuating pump prices are a significant indicator of robust competition among marketers. volatile pricing manifests itself in the form of a price war (see below). caused by price competition. volatile prices . low prices and/or margins. gasoline is a commodity. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. probably due to its relatively high cost. This study presents an extensive historical and comparative analysis of pump prices. gasoline is viewed by consumers as a commodity uniform in quality and widely available. and due to the already slim margins available to marketers. this study examines the dynamics of price competition in considerable detail. Promotion In the gasoline retailing sub-sector.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. MJ ERVIN & ASSOCIATES 20 . Promotional activity seems to have decreased in the past few years. At its extreme. In this context. due to the largely commodity nature of petroleum product. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. • • • While examples of all of these indicators are abundantly in evidence. Consequently. Examples are: • prominently displayed prices . price has proven to be the most widely used competitive tool by gasoline marketers. • Price In most markets. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next.

since they too must restore their gross product margins to sustainable levels. or even less than. one must adopt the perspectives of both consumers and competing. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. The effect of this upon the gross marketing margin is obvious: it is squeezed. in an attempt to gain market share. its effect is to restore some measure of the dealer margin. the relationship between the supplier and dealer is generally as described on page 25. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs.When pump prices are uniform. adjacent dealers.where the ex-tax pump price is equal to. the effect on many consumers is immediate: they will drive into that station. Pump price signs are an ubiquitous feature of the retail gasoline industry. If one dealer decides to reduce pump prices (by two cents. for example). One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. When this occurs. Finding 7: Price uniformity and price volatility. are indicators of a competitive market. assuming that the rack price is unchanged. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. who then react quickly to the change. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. Price Support In times of “normal” pump prices. but to competitors. the wholesale rack price. in order to maintain a reasonable market share. While this support may take one of several forms. or when prices rise or fall apparently in unison. or even being squeezed to zero . 1 This does not occur at company operated or commission outlets. competitors will likely match this price. MJ ERVIN & ASSOCIATES 21 . If the posted price increase is too high. facilitated through street price signs. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. the supplier may temporarily intervene. obviously at the expense of the supplier margin. This is a misconception. competitors may not follow. Whether through falling pump prices or rising rack prices. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. To understand the phenomenon of uniform pump prices. since there is no “dealer margin”. bypassing the higherpriced outlet. The other dealer has little choice but to quickly match. In the case of lessee or independent dealers however. and provide to the dealer what is commonly referred to as price support. or even undercut the competitor’s lower price. Pump prices therefore tend to move uniformly within a very short time.

which is administered by the federal Competition Bureau (Industry Canada). Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. While this study does not intend to undertake a detailed review of the effect of the Act. or of direct government intervention in marketing. A review of historical retail pump prices in the Halifax. In addition. provincial and even municipal levels. An examination of the effect of the Competition Act. however. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. In addition. control over retail pump price effectively reverts to the supplier. Following a year-long investigation. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. the Bureau found that there was no evidence to support these allegations1. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. 1997 MJ ERVIN & ASSOCIATES 22 . resulting in 9 convictions. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. There are few current examples of direct government intervention in the pricing of petroleum products. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. These cases have largely involved local dealers and/or isolated incidents. but reverts back to the dealer when the support arrangement is ceased. is beyond this study’s scope. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. the petroleum marketing sector has been the subject of several inquiries at federal. and a brief discussion of this case appears in part D. More recently. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition.Under the provisions of some price support mechanisms.

particularly in smaller population centres. These regulations clearly exist to the benefit of all.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. and is the single largest market for gasoline products. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. one can cite examples of regulatory obstacles to exit from the retail gasoline market. A practice. It is important to acknowledge that many regulations affecting the retail gasoline industry. or incentive for. accounts for about 37% of all refined petroleum demand in Canada. This issue is discussed more fully in part D. sales of gasoline through the roughly 16. for safety and environmental protection. creates an obstacle to. entry into an attractive market. or inhibiting. it is the single largest one. that is. Retail gasoline sales. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. MJ ERVIN & ASSOCIATES 23 . but exist to meet other important societal needs. creating a need for higher margins. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. accounting for roughly 88% of all gasoline demand. a competitive climate. So defined. inhibit competition. higher pump prices. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. as outlined above. exit from an non-viable market. Conversely. is in part. Many smaller retail owner-operators.500 retail gasoline outlets across Canada. and at least some of this capital cost is regulatory compliance-driven. to some degree. promotes or limits market-driven pump prices. or incentive for. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). The high cost of building a modern retail gasoline outlet for example. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. accounting for 41% of all petroleum demand. and consequently. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. in the form of standards for the decommissioning of retail petroleum sites. As a product group however. it is clear that government policy plays an important role in facilitating.

1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .7% Light/Heavy FuelOils 14. This survey accounts only for major established retail networks .7% Lube/Grease 1.2% Other 0.3% Total Sales Volume: 84.2% Propane /Butane 2.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.it has no practical means to enumerate each and every outlet. nor is there any federal or uniform provincial enumeration of retail gasoline outlets. Figure 5: Canadian Retail Outlet Population . as shown in Figure 5.2% Retail Gasoline 37.2% Asphalt/Coke 4.6% Other Gasoline 4. This study provides an estimate of the actual retail outlet population.9% Diesel Fuel 22.9% PetroChem Feedstocks 5.

controls the setting of the pump price. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The principal dealer and attendants are salaried employees of the supplier. using Octane counts only) is roughly equivalent to population densities. exist between retail dealers and their suppliers. as owner of the product. and all inventory and revenues belong to the supplier. as one might expect. and usually owns the brand name seen at the retail outlet.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. Several possible relationships. and this is of some importance with respect to the matter of prices and competition in this sector. Distribution of these outlets by province (Figure 6. who manages the day-to-day operations at the retail outlet. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . or modes. The supplier. the retail outlet is owned and operated entirely by the product supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. and the dealer. who holds initial title to the refined petroleum as it leaves the rack point.The estimated number of retail outlets in Canada has declined from 22. to about 16.000 outlets in 1989.500 in 1995. There are two main stakeholders involved in the marketing of retail gasoline: the supplier.

based on pump sales volume. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. the outlet facilities and petroleum inventory is owned by the supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee.sub-component margins . The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 .the entire gross product margin accrues to the brand supplier. Since the supplier owns the petroleum product at this type of outlet. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. but the outlet operator (“dealer”) is compensated by a commission payment. who pays all outlet operating costs. The dealer in turn hires attendants. The “dealer” is in essence. the supplier retains control of the retail pump price. an employee of the supplier supplier supplier typically the dealer. usually based on cents per litre of petroleum sales. Control of Pump Price Dealer Compensation supplier a commission from the supplier. supplier salary from supplier. and pays them from his commission revenue.

product from the supplier at a “Dealer Wholesale” price. not the supplier. The margin between these two prices is the dealer’s gross revenue. and has control over the retail pump price. can vary considerably from one supplier to another. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and in turn resells to the motorist consumer at a higher pump price established by the lessee. and sells at the posted pump price. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. MJ ERVIN & ASSOCIATES 27 . Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. dealer-established retail price. This dealer margin is defined as the pump price (ex-tax). the retail facilities are owned by the dealer. since it is predicated on contractual arrangements between the dealer and the supplier. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. The margin between these two prices is the dealer’s gross revenue. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. and means of compensation supplier. less the Dealer (wholesale) Price charged by the brand supplier. This Dealer Price. unlike rack or pump prices. The dealer pays most or all of the expenses associated with operating the outlet. and sells at the posted pump price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode.

Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. 1 Unless the dealer is under a price support arrangement (for instance. and fully two-thirds operate as lessees or independents. during a price war) as previously described. virtually none of the major integrated outlets are company operated. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. who themselves establish pump prices. In addition. MJ ERVIN & ASSOCIATES 28 . This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. The remainder represent one of over 50 different marketer organizations. or Imperial Oil).Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. some general figures are mentioned here. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. Petro-Canada.

Many outlets have more than one ancillary offering: many “flagship” outlets for example. average annual throughputs ranged from under 1 million litres in smaller population centres.5 million litres. and is a result of. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . more fully described in part C. Based on a sampling of outlets surveyed in this study. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. ancillary service has had the consequence of subsidizing the pump price of gasoline. reduced petroleum margins. has had a profound effect on the retail gasoline marketing sector. These improved outlet throughputs have provided for improved petroleum revenue potential. these study findings show that this can vary widely from market to market. Canadian throughputs have dramatically improved in the past several years . Most ancillary services are operated by the dealer/lessee. In effect. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. which in part has led to a reduction in retail product margins.While an average outlet throughput may be in the order of 2. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. In fact. feature both a large-area convenience food store and a modern car wash facility. Figure 8 depicts the Canadian representation of several key ancillary services. to over five million litres in major markets such as Toronto. Improved outlet revenue from ancillary operations has caused.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken.

would be somewhat higher. An “all markets” average. Since 1 Data is not regularly collected on smaller markets. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. While some of the presented findings are selfexplanatory. using a Canada 10city weighted (by provincial demand) average. This shows that pump prices have increased in nominal terms. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. the “Canada average” price reflects an average of urban markets only1. MJ ERVIN & ASSOCIATES 30 . Unless noted. particularly around 1990. including smaller markets. As such. Since rising prices are common to most consumer goods and services. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. This part examines broad trends in several areas. mainly using Canada average values. Regional and market-to-market comparisons are presented in greater detail in part D. an examination of the specific historical record of gasoline prices is useful. prices are for regular unleaded (RUL) gasoline. when the Persian Gulf War caused crude prices to increase significantly. as can be seen in part D of this study.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. many utilize terms which are explained in part A. and with which the reader should be familiar.

ex-tax equivalent prices. rack price. retail pump prices were about 7 cents less in 1995 than they were in 1986. as in Figure 10. In constant dollars. MJ ERVIN & ASSOCIATES 31 . both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. It also depicts the associated margins. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate).Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. When compared to other consumer goods. nominal pump prices decreased. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. Figure 10: CPI Index Comparison .1990. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. as defined in part A of this study. and relative crude cost. When pump prices are reduced by the amount of tax content. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes.

and in fact have displayed a declining trend over the past six years. as shown in Figure 12. as the next section shows. and the rise in the tax content. it is also useful to examine the behavior of margins. which in turn. nor do rack prices exactly follow crude costs. it simply passes on a fixed cost margin to determine the “correct” pump price. are principally a reflection of changes in the underlying price of crude oil. as might be suggested. It is important to state that pump price changes do not occur in exact lock-step with rack prices. Figure 12 shows that industry margins have not been constant over time. If. Margin History While Figure 11 provides an indication of key price trends. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. then one might expect margins to be quite constant over time. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. that is. as Figure 11 shows. and have risen slightly since 1994. the presence of these additional market factors have operated to the benefit of consumers. due to additional market factors which affect pump and rack prices at any given point in time.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. which are defined by the price points. MJ ERVIN & ASSOCIATES 32 . In fact. the downstream industry operates on a “cost-plus” basis.

emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Finding 13: From 1991 to 1996. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. as local competitive factors act to self-regulate pump prices. A more thorough discussion of specific market factors for these and other centres appears in part D. the actual fluctuation is much more pronounced than shown. which have both shown a consistent decline throughout the period 1991 to 1996.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. The decline in refiner and marketing margins has both resulted in. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. the gross marketing margin can fluctuate quite significantly1. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . not weekly or daily data. In particular. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. since the chart is based on monthly averages.crude) 5¢ Marketing Margin (retail . 1 In fact. this upward trend is not attributable to “downstream” refiner or marketing sector margins. several factors. compared to the Canadian average. MJ ERVIN & ASSOCIATES 33 . This shows that on a monthly basis. and has been a result of. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.

Canadian pump prices have been roughly equal to. On an ex-tax basis. This shows that. This difference accounts for most. although Canadian pump prices in urban markets are clearly higher than in the US. or even less than. with and without tax. this is wholly attributable to the difference in taxation. resulting in significantly higher Canadian gasoline prices. for several years. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . A comparison of Canadian and US regular gasoline pump prices.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. US pump prices. is presented in Figure 14. if not all of the difference in pump prices between Canada and the US. US Price History The retail gasoline tax structure in Canada is vastly different than the US.Figure 13: Monthly Gross Marketing Margins.

• Although this study shows that on an ex-tax basis. both a cause and an effect of improved throughputs and ancillary revenues as previously described. While these trends have also occurred in the US. as a result of outlet closures (see Figure 5. when compared on an ex-tax basis. Canadian ex-tax pump prices were historically somewhat higher than in the US. Canadian outlet throughputs (although likely still less than those of the US). This is no longer the case however. have improved considerably. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. Figure 15 compares these values for selected Canadian and US centres over a period of several years. and moving up or down more or less in unison. Prior to 1994. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. largely as a result of two factors: • Canadian marketing margins have decreased in this period. which is reflected in US average pump prices. behave in a very similar fashion. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. From this it can be seen that Canadian and US rack prices. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. This would be a useful area for further research. trading at any given time within a relatively narrow (about 2 cents per litre) range. RFG has not been introduced to Canadian markets. page 24) and somewhat increased demand. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 .

000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. Pump Price (nominal ¢/litre) 3.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.000 1. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . Figure 16: Monthly Demand vs. rising and falling closely in step with demand. and prices tend to fall.000 24¢ 1. the price tends to be bid upwards.000 2. or sales. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).000 1.000 34¢ 2. compared to average ex-tax regular gasoline pump price for the same period.000 2. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.700.500. Gasoline price exhibits a similar. Gasoline demand exhibits a very regular seasonal pattern.700. albeit less distinct pattern. and falling in the latter half of each year. Demand vs. but in fact across the North American continent (US demand follows a similar pattern). conditions begin to favour a “seller’s market”.000 2.100. As non-refiner marketers attempt to secure a supply of this diminishing inventory. increasing significantly every spring.500. as demand ebbs and inventory improves.300. or indeed anywhere. a “buyers market” develops. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.900. and as would be expected in any commodities market under these conditions. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. not only in a given market. Yet in the latter half of each year. Simply put.900.000 2. Price History Figure 16 shows the history of Canadian gasoline demand. of motor gasolines from 1991 to 1996.100.

despite a rise in demand. MJ ERVIN & ASSOCIATES 37 . which ensures a competitive product price for buyer and seller alike. This part of the study presented a number of historical views of retail gasoline prices. which consists of the refiners and marketers of gasoline and other petroleum products. the essence of a free market economy. competing to meet their own needs. On a long-term basis however. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike.Whether in the spring or the fall. the downstream petroleum industry. so do prices. demand rose approximately 8. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. their related product costs and margins. as evidenced by declining industry margins. a feature of most marketregulated commerce. while world crude prices and Canadian taxes have generally increased over the past several years. in that prices have fallen. The traditional supply-demand model predicts that when demand rises. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. pump prices have increased due to a significant rise in crude costs in this period). while average ex-tax pump price declined by 14% (since 1994. This is of course. All of the findings suggest that. and product taxes which add to the consumer price of gasoline.3%. gasoline prices have not followed the traditional model. Figure 16 shows that from 1991 to 1995. has operated in a highly competitive environment. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.

there is no regular monitoring of pump prices in smaller centres. and a more detailed examination of price. A number of factors such as taxes. play a role in a market’s pump price. although one was subsequently dropped due to insufficient submitted data. outlet volumes. and pump prices alone provide very little opportunity for “comparability”. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. margins and related implications for market competitiveness than can simply be provided by existing public-domain data.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. ancillary revenues. outlet costs.. MJ ERVIN & ASSOCIATES 38 . so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. namely product margin. These “outside factors” tend to obscure the more relevant aspect of pump price. etc. Nineteen markets were therefore adopted for the study (Table 3). Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. freight. • Methodology Selection of Markets A number of markets were selected for the study. is useful in providing broad overviews of industry price and margin trends. and in order to provide insights into the range of competitive dynamics that may exist.

Furthermore. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Five companies responded to this request: Imperial Oil. To this end. Ontario. In addition. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet.000.Each market was classified according to regional affiliation (BC/Prairie. In all.. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. the gross marketing margin must be examined in isolation from those other variables. To examine the competitiveness of the marketing. or “rack to retail” sector. and for smaller markets. Process Overview As illustrated in part A. Suncor Inc. it was essential to obtain data not normally available through existing public sources. retail pump prices . and Group B markets less than 500. Shell Canada. but a number of variables. these organizations provided market-level data on freight costs. retail outlet and brand representation.0001. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. 2 Depending upon the outlet mode.are influenced not by one.and consequently competitiveness . and Canadian Tire Petroleum. price history data not available through public sources. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. the gross marketing 1 Although White Rock is clearly not a major centre by itself. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. Petro-Canada. MJ ERVIN & ASSOCIATES 39 .

3. 1995 average values were determined for pump price. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. Finally. tax content. a market-by-market profile of outlet income is presented. average outlet annual throughput was determined for each market. From participant company supplied data. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban).margin is stripped of its freight component. For each market. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. by product grade. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Group B (smaller market) and 19-market study averages. The variables of tax content. and the final “rationalized” gross product margin was determined for each market. in addition to operating cost and ancillary revenue data gathered in the study1. The gross product margin thus serves as an interim basis for comparing study markets. Using the derived gross product margins and volumes for each market. 1 Although outlet cost and ancillary revenue data was not available for all markets. and freight. a broad representation of markets was possible. 2 Accordingly. to arrive at “blended” values2. Where differences in gross product margin might still exist. Where applicable. rack price. as the “blended” price includes other product grades. This allows for an accurate determination of net outlet revenue. to derive the 1995 average gross product margin for each of the study markets. including some smaller centres. weighted by sales demand. MJ ERVIN & ASSOCIATES 40 . this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. 2. these were weighted by volume. rack price. and freight were successively removed from the pump price. average pump prices are higher than actual average regular gasoline prices.

marketing margin. From participant company data. accurate comparisons are possible. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. and accordingly represent a broad spectrum of consumers and marketers. average revenues from ancillary services were added. and outlet operating costs were deducted from total revenue. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. Also. Unlike retail pump prices however.. petroleum revenues. grade differentials were based on known differentials of nearby markets. . Supplier Overhead costs. perhaps by 1 to 2 cents per litre. or consolidated net incomes.. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. and therefore where assumptions were made. Wholesale refined product prices used in this study are therefore likely to be overstated.. as described on page 10. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. freight. and gross product margins are therefore likely to be understated. it is important to understand that the use of rack price in this analysis has certain implications. When these margins are applied to outlet throughputs as in step 4 above. a recognized source of data on world crude oil and petroleum markets and prices. etc. objective data exist for both of these values. so that on a cents-per-litre basis. Interpretation of Data In some smaller centres. 7. also considering that RUL constitutes the majority of product. MJ ERVIN & ASSOCIATES 41 . the effect on the “blended price” is small. including relatively smaller ones such as Sioux Lookout or Gaspé. encompassing a significant portion of the entire Canadian market.to determine average consolidated net revenue per outlet. 5. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. and supplier profit.4. The derived weighted average values of pump price. 6. product margins. and from one brand to another. While clear. This variation is constant across all nineteen markets however. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. but they are relatively minor. many wholesale petroleum purchases are made at less than the “posted” rack price. A dollar-per-outlet estimate of these elements was made. These differentials do vary from one market to another. This value was then applied to the gross product margin to determine average outlet petroleum revenue. these 19 markets represent a combined population base of 8. represent a broad range of markets. In referring to marketing margins.. Bloomberg rack price values were used as the assumed wholesale price.7 million..

The first of these variables to be examined is tax. broken into tax and extax components. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. while lower prices tended to prevail in major centres. but a variance of only 12. The data also shows that typically. independently gathered data. there is little to suggest why such a high variance exists. Tax Figure 19 shows posted pump prices for the study markets.8 cent difference in pump price 1 See footnote at Appendix II. and based on objective. accurate. table J for an explanation of how variance is derived. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.64 cents per litre in pump price. higher priced markets are associated with smaller population centres.Rack prices used in this study are nevertheless market-driven. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. The 19-market study group exhibited a statistical variance1 of 17. The study data suggests that variations in tax rates account for a significant part of pump price differences.38 cents per litre in ex-tax pump price. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. A 6. MJ ERVIN & ASSOCIATES 42 . The data shows a statistical pump price variance of over 17 cents per litre within this study group.

MJ ERVIN & ASSOCIATES 43 . when examined on an ex-tax basis. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. provincial tax rates can vary greatly. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. or when examining historical price trends. while taxation between provinces is more pronounced . accounting for roughly half of the average retail price. Montreal). as described in part A.between Calgary and Vancouver for example.while all markets are subject to the same rate of federal excise tax and GST1. This eliminates any effect that tax variability may have. The data shows that taxation between markets within the same province varies little. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. it is therefore more useful to use ex-tax pump prices when comparing any two markets. thus providing a better basis for comparison.75 cents per litre (Vancouver. additional elements of the revenue stream must be further isolated. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. Figure 19: Pump Price .less than one-half cent per litre. taxes were a significant element of pump price. namely the upstream industry and refiner sector. was less than three cents. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. Upstream and Gross Refiner Margins Although the deduction of tax content is useful.tax. but the variance is minimal . In all study markets. GST content can vary by market. 1 Due to pump price differences.

To address this. the rack price is set at the rack point (Winnipeg. MJ ERVIN & ASSOCIATES Cents per litre 44 . Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie.assuming transport costs did not outweigh the price difference. in the case of Thompson). the rack price is equivalent to the upstream margin plus the refiner’s margin. reflecting the reality that at the rack level of competition. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. reflecting some differences in refinery crude acquisition costs. Freight costs are additional. as this would cause rack buyers to bring product in from the lower-priced region . one region cannot maintain rack prices at a higher level than another. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. but ultimately. This is due to the fact that for any market. are clearly delineated by market-driven crude. Furthermore. and therefore are best analyzed separately. rack and pump prices. rack price) and gross marketing margin elements. When rack price is deducted from the ex-tax pump price. if a clear understanding is to be achieved. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. it should be restated that each of these sectors. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. differ little from those of major centres. as is examined below. the validity of analyzing gross marketing margins in isolation might be raised. and their respective margins.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining.

it is essentially a “non-core” business. generally smaller markets. Figure 21 shows a study market comparison of gross marketing margins. resulting in comparative gross product margins. remote population centres. To provide a comparative view of the marketing dynamics within the study group. and therefore a significant pump price factor. MJ ERVIN & ASSOCIATES 45 . it is therefore important to eliminate the freight variable from the gross marketing margin. For markets which are also established as rack points. Although freight operations are often an integral part of many petroleum marketing operations. one final outside variable must be isolated: that of product freight. For other.3 cents per litre. this freight cost is almost negligible. in fact.49 cents per litre (gross product margin).0 cents per litre. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. the data shows that freight is often a significant part of the gross marketing margin.16 cents per litre (gross marketing margin) to 7. as low as 0. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. Two of the study markets had freight costs in excess of 3. particularly in comparisons of major urban markets to small. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. Before using this as an analytical tool however. with their component freight costs.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector.

whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.5 cent per litre average relates to regular gasoline in major markets. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.17 cents per litre.06 cents per litre.95 cents per litre.the gross revenue available to the petroleum marketing sector for its operations. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.22 cents per litre Smaller markets showed a wider variance in gross product margin . Bloomberg rack price values were used as the assumed wholesale price. or between any two regions. For all study markets.42 cents per litre.6. or consolidated net incomes. was the highest of the study group. Gaspé. was the lowest.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.6 cents) to the variance in their component gross product margins (7.5 cents). In referring to marketing margins.68 cents per litre1. to the resultant retail gross product margin . 1995 gross product margin averaged 5. Group A (larger population) markets averaged 5. MJ ERVIN & ASSOCIATES 46 . at 14. A 7. petroleum revenues.5 cent variance in gross product margin is still significant however. The study revealed that: • • Retail gross product margins differ very little between major urban markets . as the 3.a variance of only 2. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.5 cents per litre average Gross Product Margin cited in Part B. while Toronto. while Group B markets averaged 7.68 cents per litre. at 3. product margins.

once isolating retail gross product margin from all of the “outside” pump price factors. 3. A wide range of volume performance is evident.000.000 litres per year (Toronto).000 litres per year (Sioux Lookout) to over 5. it would likely be so unprofitable as to be un-viable. an examination of related outlet throughput volumes is necessary.differences between markets.2 cents per litre in Gaspé. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . a wide range of variability still exists between markets in the study group .000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets.000.000 Litres 3.000 5.1 cents per litre in Toronto. Figure 23: Average Annual Throughput per Outlet 6. Indeed.000. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. If these two factors are related to each other as they are in Figure 24. for example.000 4. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000.000 2.000 1.000. vs. if any retail gasoline outlet located in the Toronto area for example. ranging from under 700. sold significantly less than 5 million litres of petroleum per year.000.14.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.

000 Volume (litres) 4.6624 1.7 million respectively. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.Figure 24: Outlet Volume vs. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.42 cents) than smaller (Group B) population centres (7. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.95 cents).962 R2 = 0. not of poor competition.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. Regionally. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000 2. Ontario.000 6.4 million litres annually. As most outlet operating cost are fixed in nature . the Group A market outlets had roughly 50% more throughput than Group B outlets .000. while those with high Gross Product Margins tend to have low outlet throughputs.000 5. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. it follows that higher gross product margins will be the consequence. they remain essentially the same regardless of volume changes .000 3.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. Smaller markets perform as competitively as larger centres. Although MJ ERVIN & ASSOCIATES 48 .000.that is. With few exceptions.000.000. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. all market groups (BC/Prairie. compared to 2. On average however.6634Ln(x) + 76.000. If all outlets in a given market experience generally low throughputs.000.

Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. and incur many expenses in the course of their commerce.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. as described below. two additional factors are introduced: ancillary revenue and outlet operating costs. These additional factors clearly have an effect on the relative competitiveness of retail markets.000. It represents the residual revenue which is available to the dealer and to the supplier. this is likely due to the higher incidence of Group B study markets within this region.000. averaged $69.000 2. while operating costs are those costs which are directly incurred in the operation of the retail facility.000 6. which for the study group. and the resultant consolidated net revenue. In reality.716 . Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). and must be examined.000 4.000 5. in addition to petroleum sales. and auto service.000. such as convenience stores. Gross product margin. ancillary sales. Ancillary revenues are those derived from non-petroleum sales sources. is only a measure of petroleum revenue per litre.000 3. supplier overhead costs. and supplier MJ ERVIN & ASSOCIATES 49 . product cost. Figure 26 summarizes total outlet petroleum sales.the revenue available for dealer income.000. however. less outlet costs. Figure 25: Outlet / Volume Relationship .Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.000. Consolidated Net Revenue per Outlet To create a complete. supplement their incomes with other revenues. and ultimately shows that very little difference in competitiveness exists between any two markets. which.000. outlet-based view of retail markets. car wash. competitiveness occurs between retail outlets.

000 $200. Table K).000 per year respectively . petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.000) $(200.$154. and his personal labour investment. MJ ERVIN & ASSOCIATES 50 .000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.000) $(150.000) $(250.000) $(300.Group B outlets were not as profitable as these revenue values might suggest. Most markets showed relatively similar net revenues (see Appendix II. these ancillary operations contributed to a lower product margin and consequently. which reflects his investment in the outlet. $60. Figure 26: Outlet Revenues. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. Finding 19: Based on published rack prices.000 $50. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. Income BC/PR $300. Costs. An examination of these component elements reveals a significant finding: that for most markets. reduced pump prices. as explained below. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets .000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000 $150.000) $(350. causing the weighted average for Quebec / Atlantic to be depressed). A discussion of the ultimate distribution of this revenue is useful.profits.000) $(100.000 $100. As described above. In effect.000 vs.000 $250.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.98 ¢ 0. Vancouver collects a 4 cent per litre municipal tax. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. net outlet revenues were less than those of other major centres.000 barrel per day plant located in the greater Vancouver area. ranking 11th.542.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . while average throughput ranked 4th.968 litres 7.38 ¢ 7. The somewhat high margin placed this market slightly above. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.Vancouver population # of brands # of outlets outlets per 10.658.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.ex tax Canada Average . Influence of other markets: Although relatively close to the US border.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. Geographic / Supply / Freight cost considerations: As a port city. Overall. and also has local refining capacity. and with access to wholesale product by several means.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Vancouver is also a terminal for a refined products pipeline from Edmonton. a 60. Figure 28: Vancouver . but well within a cluster of markets with similar throughputs.745 18 446 2. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.000 1. contributing to a higher than average pump price. as described below. Low consolidated net revenues may have contributed to the higher margin. Vancouver provides several perspectives into retail marketing. this market has access to numerous refiners along the Pacific coast through marine supply. This may explain the somewhat elevated gross product margin in this market.

due to its proximity to one. This suggests that. or competitive dynamics.604. prices. MJ ERVIN & ASSOCIATES 55 .000 16. Average outlet throughputs were relatively high. gasoline “cross-border shopping” is less pronounced than might be expected.98 ¢ 0. prices in this market have historically mirrored those of Vancouver.45 ¢ 7. at least in this market. This market is close to its usual rack point. and retail gross product margin was less than that of markets with a similar population base. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. Freight costs were accordingly low compared to other small markets in this study. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. Geographic / Supply / Freight cost considerations:.White Rock population # of brands # of outlets outlets per 10. White Rock is essentially part of a major market due to its proximity to Vancouver.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. the White Rock retail gasoline market displayed the same attributes as a major urban market. White Rock’s margin was typical of markets with similar outlet throughputs. Influence of other markets: Although this market is a border-crossing community. Like Vancouver. Despite its relatively small size. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. This is likely due to the fact that unlike many smaller markets. adjacent to the United States border. In all respects. this market is subject to a 4 cent per litre municipal tax. but less than most markets with a small population base. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.315 4 8 4. Vancouver.630 litres 7. Price history / Taxation: Although no specific data is available. the study data found little to suggest a material effect upon representation.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. thus providing some unique characteristics for the market study.

Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Calgary had the third highest number of retail brands. Price history / Taxation: As the figure below shows. indicative of a strong competitive climate. Some smaller markets in the vicinity have occasionally priced below Calgary. creating some competitive pressures (see Nanton).000 710. Indeed. Product is usually sourced from Edmonton refineries via pipeline. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.ex tax Canada Average .4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.675 27 313 4.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Figure 29: Calgary .24 ¢ 6.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada.827.719 litres 6. Calgary pump prices are very close to the Canadian average. Rack-to-outlet freight costs are among the lowest in the study group. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. pump prices in this market have historically been well below the Canadian 10-city average. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Other considerations: Of the markets studied. Calgary is of sufficient size to support a viable rack market.47 ¢ 0. Consolidated net revenue: was typical of other major markets in the study group.Calgary population # of brands # of outlets outlets per 10. Influence of other markets: Calgary is fairly remote from US and other major markets. which was one reason for selecting Calgary as a study market.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .

Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.ex tax Canada Average . this market is removed from other significant markets.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .180 15 86 4.000 179. and this market is now more typical of other large population centres.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . This is partly due to provincial taxation levels. and is therefore a recognized rack pricing point. price volatility has eased. Regina was of some interest as a study market.50 ¢ 0.21 ¢ 7. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. and therefore experiences no particular influences from any other major market.089. Influence of other markets: Like Calgary. which are among the highest in Canada. Figure 30: Regina .Regina population # of brands # of outlets outlets per 10. Consolidated net revenue: was typical of other similar markets.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.794 litres 7. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. Although no supporting data is available. margins and throughputs were typical of other markets with a similar population base. it is likely that this reflected a surplus of wholesale inventory within the local market or region. Since 1993. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. supply/demand is likely more balanced. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. Since then. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Ex-tax prices are also above average. and a history of volatile pump prices.

ex tax Canada Average .06 ¢ 0. it is an established rack price point. and therefore experiences no particular influences from any other major market. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . although there is no study data to support this.22 ¢ 7. probably related to a regional surplus of wholesale inventory (see Regina).Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price .Winnipeg population # of brands # of outlets outlets per 10. this market has exhibited relatively stable pricing.790 17 261 4.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. Since then. though somewhat higher than average ex-tax pump prices. although.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. On an ex-tax basis. Consolidated net revenue: No ancillary or outlet cost data was available for this market. and has remained very close to the Canadian 10-city average.265. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. Price history / Taxation: In the early 1990’s this market experienced some price war activity. This may reflect a lower than average Consolidated Net Income. possibly due to modest ancillary revenue.000 616. prices have tended to stay somewhat above the Canadian average. Figure 31: Winnipeg . this market is removed from other significant markets. like most markets of this population density. Influence of other markets: Like Calgary.217 litres 8.

Average outlet throughputs were relatively low. In this respect. and perhaps healthy ancillary sales associated with highway traffic.600. Consolidated net revenue: No Ancillary or cost data was available.far in excess of what would be expected of a community with a population of 1. this market has a relatively low freight overhead. Despite its small size. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. while others experience consistently high prices. due to its proximity to one. Unlike many of the smaller markets in this study group.585 4 5 31.000 1. would have an offsetting effect. Influence of other markets:. a feature not available to other. in order to maintain a share of the considerable potential sales revenue that passes through this market. Alberta population # of brands # of outlets outlets per 10.91 ¢ 0. the Nanton retail gasoline market displayed the same price attributes as a major urban market.000 litres 5.the highest of the entire group . Nanton had a high number of per capita outlets . as Figure 24 shows. MJ ERVIN & ASSOCIATES 59 . Nanton has traditionally priced either at or below Calgary. more isolated small-town markets. Due to its highway location and its proximity to Calgary. Nanton had the second lowest gross product margin of the study group. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. although not as low as expected. While these conditions would normally result in a high gross product margin. Nanton was the smallest market in terms of population.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.Nanton. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. in terms of expected petroleum revenues. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Price history / Taxation: In order to attract market share beyond simply the local population.and a low average outlet throughput. it is likely that low operating costs. the retail gasoline market in Nanton was not restricted to the local population.41 ¢ 5. Nanton appeared to benchmark its pump prices to those of Calgary. placing Nanton well below the expected margin. Nanton was perhaps the least viable market in the study group. situated on a major North-South highway to the United States Among the study group.071.

Price history / Taxation: Peace River is typical of small. and due to its isolated locale in northern Alberta. isolated markets. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. experiencing relatively high gross product margin and consequently. Geographic / Supply / Freight cost considerations: At 1.6 ¢ 10. further adding to overall high pump prices. In contrast to Nanton.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Peace River has among the highest freight cost in the study group. high pump prices.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. its normal rack point. Peace River also experiences high freight costs. Supply is via tanker truck from Edmonton. other markets. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. and in fact fell into a tight cluster of four other study markets. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. though fairly typical of many smaller.157.000 6. and was accordingly chosen as a study market. isolated markets. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. MJ ERVIN & ASSOCIATES 60 . they were comparable to other markets with similar average throughputs. this market has little or no influence upon.6 cents per litre. Alberta population # of brands # of outlets outlets per 10.45 ¢ 1.Peace River.623 litres 12.715 6 8 11. nor is it influenced by.

Thompson is faced with the dilemma. its usual rack point. isolated markets. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. outlet costs were also modest typical of most smaller markets. It also experienced high freight costs.Thompson. other markets. Although outlets in Thompson appear to be as competitive as those of any other study market. and in fact fell into a tight cluster of four other study markets. this market has little or no influence upon. Other considerations: Like other small markets. Consolidated net revenue: Low outlet throughputs were offset by higher margins. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. the community of Thompson clearly falls into the category of a small. These factors resulted in relatively strong per-outlet net revenues. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.014.000 14. Thompson is among the highest freight costs in the study group. they were comparable to other markets with similar average throughputs. Supply is via tanker truck from Winnipeg.02 cents per litre. nor is it influenced by. resulting in per-outlet petroleum revenues which were quite typical of many markets. experiencing relatively high gross product margin and consequently. further adding to overall high pump prices. This however. and reduced pump prices. thereby creating the potential for narrower margins. MJ ERVIN & ASSOCIATES 61 . Although ancillary revenues were the smallest of the study group. high pump prices. Manitoba population # of brands # of outlets outlets per 10.02 ¢ 11.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. a significant portion of which would likely be distributed towards supplier overhead costs. remote market. Geographic / Supply / Freight cost considerations: At 3. Price history / Taxation: Thompson was typical of small.520 litres 14. and due to its isolated locale in northern Manitoba.1 ¢ 3. Influence of other markets: Since is not located on a major inter-uban thoroughfare.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River.975 5 6 4.

06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.098. it had the second highest brand variety of the study group. Influence of other markets: This market is continuously linked with several other major retail markets. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. thus there exists a climate of robust competition.Toronto population # of brands # of outlets outlets per 10.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. similar to that of Montreal. this market ranked first in a number of measures: lowest gross product margin. New York. Figure 32: Toronto . Consolidated net revenue: Although no study data was available for this market.275. It consequently has a low freight component. In addition. With an average “blended” gross product margin of only 3. This is likely offset by high operating costs.000 2.extax Toronto Posted Price . On an ex-tax basis however. and first in average throughput per outlet.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .775 30 546 2. and a resultant low consolidated net revenue.478 litres 3. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. and is also relatively close to wholesale supply sources in the US. Within this region are thousands of retail outlets.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .06 cents per litre. least number of outlets per capita. it is likely that outlet ancillary revenues are among the highest in the country. as evidenced by an exceptionally low gross product margin. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.36 ¢ 0. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. stretching from Pickering to Buffalo. this market was consistently less than the 10-city average.3 ¢ 3.

004.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.145 19 209 3. slightly lower that expected. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. ancillary revenue was slightly lower than average.29 ¢ 5. in fact. Influence of other markets: Although Ottawa is the only major market in the immediate area.000 678. several smaller. Although petroleum revenues were typical of major markets. rural markets co-exist in this area. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. freight costs within this market were quite low. Other considerations: While pump prices in this market were somewhat higher than in Toronto. exhibiting all of the characteristics of robust competition.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. and operating costs were higher than most.Ottawa population # of brands # of outlets outlets per 10.97 ¢ 0. some of which have on occasion priced below Ottawa (see Nanton and Calgary). Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.948 litres 5.ex tax Canada Average . and close to the Canadian 10-city average.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Consolidated net revenue: was low. Figure 33: Ottawa .

22 ¢ 7.475 10 24 2. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Influence of other markets: This market is close to a US border market.000 81.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. This would suggest that a significant market share is being lost across the US border. average throughputs were modest.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.550 litres 8. and between 5 to 8 cent per litre in gross product margin. MJ ERVIN & ASSOCIATES 64 . yet with some potential for cross-border retail competition.73 ¢ 1. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). Pump prices in this market were thus typical of any market with similar throughput characteristics.Sault Ste Marie population # of brands # of outlets outlets per 10. a product of relatively strong net petroleum revenues combined with lower than average operating costs. somewhat isolated. this Canadian market has some difficulty in remaining both competitive and viable. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. and accordingly. partly due to higher freight costs.465. a consequence of the transport distance from the rack point. Freight costs are therefore high. Sault Ste Marie is a sizable market.

066 litres 14. Freight costs are therefore high. This is a major factor in the high cost of gasoline in this market. This would suggest that. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.000 3.2 ¢ 11. and had the least number of outlets. An average outlet in Sioux Lookout pumped only 694.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. brands. and outlet throughputs of any market studied. despite its high prices. this market experiences a high degree of price competition.96 ¢ 3. Influence of other markets: This is clearly an isolated market.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. MJ ERVIN & ASSOCIATES 65 . Sioux Lookout is well-removed from any major highway. It therefore presents some unique characteristics for the market study. largely due to higher freight costs. was much less than expected for a market of this size.310 3 3 9. one-seventh the average throughput in Toronto. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. in fact the second highest in the study group. although high.Sioux Lookout population # of brands # of outlets outlets per 10.006 litres in 1995. so that virtually all sales volume represents local demand only. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. with little or no influence from other retail gasoline markets. Consolidated net revenue: No data was available for this market.

On an ex-tax basis however. Figure 34: Montreal . This.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 .775.extax Montreal Posted Price . Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. Influence of other markets: Like Toronto. and is also relatively close to wholesale supply sources in the US. pump prices in this market have a tendency to be volatile.394. this market interacts with several other markets in the region. pump prices in Montreal have generally been at or below the 10-city average for major markets.3 ¢ 5. thus promoting a competitive climate.870 32 866 4.144 litres 5. combined with low petroleum revenues and high operating costs. Montreal was included in the selected market study.000 1. placed Montreal lowest of all study markets in terms of consolidated net revenue.5 cents per litre was introduced into the Montreal area). It therefore represents a highly competitive rack market.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .Montreal population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. With 32 competing brands. an additional tax of 1.43 ¢ 0. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. this market ranks first of the study group in terms of brand variety. Price history / Taxation: As the figure shows. with resultant low average outlet throughputs. a function of a competitive rack market and an excess of retail outlets competing for market share.

this market has little potential as a rack market. Freight costs are therefore somewhat high.Chicoutimi population # of brands # of outlets outlets per 10. although low. for example). In the case of Chicoutimi. MJ ERVIN & ASSOCIATES 67 . a partial factor in the high cost of gasoline in this market.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.605 14 97 8.250. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. both pump and ex-tax prices in this market were higher than average. but as the figure shows. Nevertheless.75 cents per litre.000 120.28 ¢ 1. Margin/Throughput relationship (Figure 24): Outlet throughputs. within a cluster of other markets with similar attributes. Gross product margin was accordingly high.08 ¢ 11. yet is geographically quite isolated. Chicoutimi is normally supplied from the Quebec city rack. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. but is quite isolated from any other markets. this amounted to a reduction of 5.289 litres 12. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. by tank truck. Consolidated net revenue: was average among the study group. were quite typical of markets with similar populations.

Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack.17 gross product margin the highest of the study group. in fact the highest in the study group.900 litres 17. MJ ERVIN & ASSOCIATES 68 . with little or no influence from other retail gasoline markets. ancillary revenues would likely be modest.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Nevertheless. Influence of other markets: This is clearly an isolated market. a key factor contributing to its 14.400 6 13 4. in the case. located at a considerable distance from its rack source of supply.50 ¢ 3. This is a major factor in the high cost of gasoline in this market. a product of high freight costs and gross product margins.Gaspé population # of brands # of outlets outlets per 10.000 16. Gaspé is well-removed from any major highway. this margin was only slightly higher than expected for a market with these throughput attributes. Nevertheless. Consolidated net revenue: No data was available for this market.33 ¢ 14. by tank truck. Freight costs are therefore high.75 cents per litre. so that virtually all sales volume represents local demand only. Although operating costs are likely to be low in a small market like Gaspé. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. both pump and extax prices in this market were higher than average.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. amounting to a reduction of 5. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group.

which for Saint John. Accordingly. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.000 74. and is capable of shipping and receiving wholesale product through marine facilities. retail pump prices are ultimately a reflection of rack prices. freight costs in this market are low. Nevertheless. Average gross product margin was consequently high.095. Figure 35: Saint John NB . Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. In fact. the Saint John retail market is relatively isolated from other retail markets of any significance. Consolidated net revenue: was average for the study group.Saint John NB population # of brands # of outlets outlets per 10.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . and therefore. reflected in the high ex-tax pump price.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. Since provincial taxes are among the lowest in the country.extax MJ ERVIN & ASSOCIATES 69 . ex-tax prices were relatively high. That a major refinery resides in this market might suggest that these prices should be among the least in the country.970 9 56 7.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.694 litres 9. posted pump prices in the Saint John market have closely followed the 10-city average. with or without a local refinery.27 ¢ 9.79 ¢ 0. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. it is an established rack point. Saint John presents some unique characteristics for the market study. do not differ markedly from any other rack point in the study group. this market fell within the expected range of gross product margins as a function of outlet throughput.ex tax Canada Average . resulting in lower than expected average outlet throughputs. Price history / Taxation: Historically.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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....... these ancillary operations contributed to a lower product margin and consequently.................................................. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements..... ......................Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products............... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.................................................................................... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads.... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations....... when compared on an ex-tax basis......... 48 Finding 19: Based on published rack prices................. residuals for outlets not studied may be better......... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.................... 33 Finding 13: From 1991 to 1996.. The viability of the Canadian retail gasoline sector as a whole may be somewhat better... while those with high Gross Product Margins tend to have low outlet throughputs........................................... remote population centres........ ... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences. particularly in comparisons of major urban markets to small. the residual represented a net loss to the supplier........ while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre............ .. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre................ the profitability of the 481 outlets studied appears only marginal............................................................. given the possibility of discounts from posted rack prices and potentially lower overhead costs..................... reduced pump prices............ 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness. ..... ................ 71 MJ ERVIN & ASSOCIATES 73 .. are principally a reflection of changes in the underlying price of crude oil......... which in turn....... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.. ........... In effect............................. and likely a negative impact on consumers........ a feature of most market-regulated commerce.. 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes...................................................... which ensures a competitive product price for buyer and seller alike...... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences..........51 Finding 21: Based on published rack prices and the individual outlet data.... 50 Finding 20: For the 481 individual outlets studied......................................................

2. in comparing Canada average (city) pump prices to those of the United States. Virtually all of the competitiveness indicators examined in this study relate to price. The Canadian retail petroleum products industry. is mistaken. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). when measured in constant and nominal dollars. Although an objective measure of competitiveness is elusive. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. was observed (Finding 10). In comparing several diverse markets. Canadian prices have been at or below US prices in recent years.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. and promotions are the other three). The resultant margins. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. over the long term. price is but one of four competitiveness “tools” available to marketers (product. 1. by all objective measures available to this study. The study presents such a model. Rack and pump prices are determined in competitive marketplaces. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . was shown to be strongly competitive: • A long-term decline in pump prices. exhibited a diminishing trend (Finding 13). This has not simply been a result of a decline in underlying raw materials costs. when taxes were excluded (Finding 14). the very margins within which this industry operates has. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. place. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. As described in this study however. each with unique dynamics. On a national level.

but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. and do. and in some markets. municipal levels of government. demand and other competitive factors existing at the time. crude costs accounted for roughly 34 percent (Finding 2). since this is the effective range of consumer choice. Dealers were shown to have a variety of relationships with their supplier. The demonstrated exception to this is in markets directly adjacent to nearby US markets. refiner margins accounted for 5. well over half of all outlets in Canada operate as lessees or independents. and are a predominant cause of inter-regional pump price differences (Finding 16). are thus a reflection of the state of product supply. but given its magnitude. experienced higher than average pump prices. or even between Canadian markets with differing tax structures. presents a competitive disadvantage to Canadian marketers. or 6 percent (Finding 6) of the 1996 average regular pump price. This implies that the competitive dynamics pertaining to these retail markets can. vary considerably from one population centre to another. rack price and freight cost. MJ ERVIN & ASSOCIATES 75 . the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. and accordingly. provincial. these markets have managed to sustain a certain level of viability and competitiveness. when the “outside” factors (tax. and in some markets. Taxation is a significant factor in the price of retail gasoline. retail petroleum markets are considered local (municipal) in scope. particularly smaller ones. Petroleum product taxes are levied at the federal. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study.5 cents. an exercise that consumers are unlikely to engage in. 3. The latter two can vary considerably from one market to another. In applying such a model to the retail petroleum marketing industry. generally do not serve as competitiveness inhibitors. and product margins accounted for 3.3 cents or 9 percent (Finding 5). taxation differences between Canadian and US markets. By contrast. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). Due to the localized nature of competition in the retail gasoline marketing sector. for example) were rationalized.even negative values. but even in such cases. but also rack prices and outlet performance. While some markets. This would entail the tracking of not only pump price. taxation as an element of public policy is an area worthy of additional research. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. it is important to understand that. measured against the average outlet throughput for that market.

Pump price fluctuations can be an indicator of competition in the marketplace. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. reflecting consumer demand behavior (Finding 15). incorporated with ancillary revenues and outlet costs. This margin represents gross revenue (after wholesale product and freight cost) which. the absence of price war activity does not imply a lack of competitiveness. is available to provide for all retail marketing operations including outlet costs. 4. a price-stable market. Demand for gasoline was shown to vary significantly according to the time of year. which in turn is the principal driver of ex-tax pump prices. constitute a small portion of the retail pump price. Sioux Lookout. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. in a highly distinct. the Canadian retail marketing sector realized an average gross margin of 3. on the basis of price fluctuation alone. 5. Retail gasoline marketing revenues. While price wars are undoubtedly an indicator of competitiveness. showed a close relationship to underlying crude prices (Finding 11). fluctuating prices are a strong competitiveness indicator (Finding 7). supplier costs and profitability. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. In fact. The pump price/margin model shows that in 1996. which represent the majority of Canada’s population base. Rack prices were shown to not significantly differ between major centres. and a loss in the case of urban markets. predictable seasonal pattern. This consolidated outlet revenue. second only to the United States. Retail pump prices showed a corresponding seasonal pattern. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. MJ ERVIN & ASSOCIATES 76 . Viewed from this perspective. Retail pump price changes showed a close relationship to underlying rack prices. on a per litre basis. which in turn. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). when distributed these three ways (Finding 20). dealer income. and more price-stable markets such as Sioux Lookout.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). when examined on the margin-volume model. exhibited competitive traits typical of any of the study markets. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

While these economics might appear to place this industry in a position of poor viability. not price. including: • • • improving production efficiency through refinery plant rationalizations (closures). Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. but to increases in underlying rack prices. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). despite the predisposition of many observers to use them as such. and has been a result of. Also. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. and the associated industry initiatives which are ongoing in nature. Both the downward trend in margins. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. if Canadian average pump prices were only one cent higher than they were in 1995.6. not excessive profits. despite increases in tax content and crude costs (Finding 12). in the long term these fluctuations are likely more reflective of market restorations. this industry sector would have realized profits of unprecedented proportions. MJ ERVIN & ASSOCIATES 77 . Indeed. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. and have resulted from. Nevertheless. these findings clearly show that pump price increases are ultimately linked not to increased profits. and the marketing sector in particular. Also. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Thus. This trend has both resulted in. Declining refiner and marketing margins. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. intense competitive pressures in the downstream industry in general. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. based upon an assumed posted rack price. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). most outlets used in the 19-market study represent major integrated oil companies. assuming all other costs were unchanged. and in turn. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. have caused. 7. Thus. both of which are beyond the direct influence of Canada’s oil companies. crude costs. Industry profitability is extremely sensitive to very small changes in pump price. Since 1991. several competitive strategies.

there are three points to consider: • In very small markets. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. and this study showed that gasoline prices were no exception.5 million fewer litres of gasoline than a group A (major centre) station. A wide range of petroleum gross product margins were evident within the 19market study group. regardless of size. more isolated markets are generally higher than in larger centres. the solution would be to encourage some dealers to exit the market. In suggesting this approach however. although this study provides comprehensive evidence of this.8. • • At first glance. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. virtually all of the 19 study markets exhibited similar levels of competition. which could actually inhibit competition. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). 9. Outlet throughput is a key determinant of inter-market pump price differences. The costs of most consumer goods in smaller. reducing the number of outlets may also reduce the number of competitors. it would seem that if local government in smaller markets were interested in lowering pump prices. This created some economic pressure to sell product at a higher pump price. isolated markets face particular challenges: although found to be highly competitive. While competitiveness in most smaller markets was shown to be as active as in larger centres. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. Smaller. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. according to the margin-volume model. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. When plotted against the margin-volume model. average pump prices were relatively high. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. most markets. had petroleum margins which were commensurate with average outlet throughput for that market. Although some smaller markets appeared to have higher gross product margins than larger markets. That such a relationship should exist was not surprising. which should. other factors exist which contribute to relatively high margins and prices. reduce pump prices. When these margins were compared to their corresponding outlet throughputs. thereby improving petroleum volumes and ancillary revenues at the remaining sites. poor outlet throughputs were generally the predominant factor. Thus. MJ ERVIN & ASSOCIATES 78 .

This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). and in turn. The loss of employment represented by a station closure may be of some concern to smaller communities. Convenience store. the Halifax market. in order to build upon the findings in this study towards a full understanding of the dynamics at work. Charlottetown. characterized by narrow product margins and relatively flat pump prices. depressed petroleum revenues below that of outlet operating costs. Retail ancillary operations are a critical element of petroleum price competition. This competition then. are an acceptable limitation on pure competition (Finding 8). under the current PEI regulatory structure. does not appear to benefit in consumer terms. and as such. is both the cause and consequence of increased activity in ancillary operations. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. As these findings show. will likely preserve a highly competitive petroleum market. is viewed as an agency which exists to the benefit of industry and consumer alike. The historical record is clear however: since deregulating pump prices. has seen a decline in pump prices relative to other Canadian markets. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). The federal Competition Bureau for example. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. and the perceived effect on their markets. MJ ERVIN & ASSOCIATES 79 . the degree of price competition in the retail petroleum has in effect. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. 10. car wash. 11. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence.• A full-serve retail gasoline outlet typically employs 3-5 staff. and the traditional automotive service bay. Also. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. is well beyond the scope of this study. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. and likely others in Nova Scotia. many national and local environmental regulations exist for good cause. as marketers find even more innovative ways to attract market share. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues.

Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. A regular comprehensive competitiveness evaluation.This study proposes rather. as it does in the Canadian petroleum marketing sector. and the nature of competitiveness influences. direct regulatory interventions may have an adverse effect on competitiveness. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. and the converse image held in much of the public domain. Improve public understanding and awareness of competition in the petroleum marketing sector. petroleum marketing competitiveness. margins and competitiveness factors. Develop cooperative industry research into marketing sector competitiveness issues. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This should be in the form of a quarterly summary of price trends and related measurements. Public perception measurement. that where a healthy competitive climate exists. possibly to the detriment of the consumer. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . in a simple format designed for consumers and legislators. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. 1. not inhibit. 2. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.

along the lines of the model used in this study.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. using Canadian and foreign selected markets. MJ ERVIN & ASSOCIATES 81 . and issues/opportunities facing such markets. consumers. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. and in particular. using Canadian and foreign selected markets. • • • • * * * Better understanding of this industry. and regulators alike. using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. by industry. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness.

Appendices MJ ERVIN & ASSOCIATES 82 .

such as lessees. etc. independent dealers. Major Oil Company .. service bays. the regular unleaded pump price.a service provided in addition to the basic retail petroleum sales operation. which serves as the voice of the petroleum products industry in Canada on environment. but inclusive of any corporate taxes on earnings.Canadian Petroleum Products Institute. MJ ERVIN & ASSOCIATES 83 .an organization who sells refined petroleum products to end-use consumers.a generic term referring to a retail outlet operator. Distribution Costs . and therefore purchases its supply of petroleum product from an outside source. and in some regions. Usually expressed on a per-unit basis.a petroleum marketer who is not involved in the refining of petroleum products. safety and business issues. in cents per litre.(for the purpose of this study) the cost.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. CPPI . etc.the retail price of gasoline that would be displayed if all product taxes were removed. health. There are several modes (see below) of dealer operation. and included in the retail pump price. Downstream . such as a major oil company or regional refiner/marketer. such as a retail gasoline outlet. Ex-tax Pump Price . The ex-tax pump price is exclusive of these taxes.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. such as convenience goods. Grade Differential . Marketer . currently established at 10¢ per litre. diesel. Margin . These product taxes include Excise tax. provincial pump tax. of transporting petroleum product from the rack point to the final point of sale.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline.the difference in pump price between a premium or mid-grade of gasoline vs. Lessee .a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived.. Integrated Oil Company . GST. generally expressed in cents per litre. and commission dealers. municipal tax levees. lubricants. car wash. for example. Dealer .I Glossary of Terms Ancillary service . an association of petroleum refiners and marketers. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. Excise Tax . Independent Petroleum Marketer .

Rack Price . Supplier . and independent dealer. Regional Refiner/Marketer . the raw material from which petroleum products are manufactured. PCF . Rack Point .the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Throughput . manufactures (from crude oil) a range of petroleum products suitable for consumer use.the wholesale price posted at the rack point. the supplier has initial title to the petroleum product as it leaves the rack point. an association of upstream and downstream oil companies and related organizations. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.within the context of retail gasoline marketing. usually per month or per year.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. these can be broadly classified as company operated. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. Upstream .the type of contractual relationship between the supplier and the dealer (outlet operator). or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. MJ ERVIN & ASSOCIATES 84 .the segment of the oil industry involved in the exploration and/or production of crude oil. In the retail gasoline sector.the point at which title to refined product is transferred from the refiner to the supplier. This may be at a refinery loading terminal. lessee. it is usually based on the market-driven rack price.Mode . Transfer Price . Although in theory the transfer price could be set at any arbitrary value.Petroleum Communication Foundation. commission dealer.an organization who. Refiner .

1 146.4 45.5 145.3 27.8 47.7 118.2 30.4 120.5 49.0 19.1 105.8 106.5 100.7 30.1 151.5 25.3 96. No.7 132.2 20.3 19.6 91.3 1992 128.1 104.7 122.0 42.1 97.8 132.5 112.3 132.2 49.9 1994 130.1 103.3 1989 114.1 120.1 48.5 94.5 124. using a weighted (by provincial gasoline demand) 10 city average.2 121.4 57. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.9 1993 130.6 133. 62-010: Consumer Prices and Price Indexes.5 30.0 115.9 97.7 22. MJ ERVIN & ASSOCIATES 85 .9 1995 133.8 108.6 92.3 115.9 115.3 125.0 93.4 152.4 110.4 97.4 27.0 1991 126.1 26.4 122.3 160.9 26.3 139.1 115.9 26.6 136.3 134.0 93.7 95.2 109.3 58.6 51.8 28.7 29.0 135. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.0 102.1 144.1 126.2 133. Nominal (¢/litre) (2) RUL Annual Price.2 45.4 34.7 123.2 112.8 93.1 87.8 94.8 95.4 124.0 1988 108.2 99.9 108.3 151.5 120.4 136.8 104.5 115. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.5 111.6 107.1 117. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.8 1987 104.1 117.3 122.0 111.2 50.3 55.2 127.4 134.8 130.1 104.3 141.0 32.7 124.2 39.3 40.8 135.3 119.0 97.1 40.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.4 29.0 30.4 53.7 54.1 120.1 167.3 52.7 96.2 31.2 142.9 118. Nominal (¢/litre) (2) RUL Ex-tax Price.2 92.0 104.4 104.9 155.6 122.5 126.9 122.1 1990 119.2 45.4 104.

0 15.1 39.7 33.1 13.6 7.8 25.7 4.1 16.8 23.8 30.9 7.9 17.1 29.1 16.5 23.0 24.3 26.5 19.2 7.7 13.8 26.9 11.1 5.7 4.3 Tax Content 23.3 12.7 4.9 7.1 18.1 18.6 13.5 25.2 7.6 23.2 12.8 14.6 8.4 9.5 56.6 54.1 23.3 5.9 12.4 15.4 13.5 57.9 6.0 26.5 8.0 25.6 26.5 23.7 7.7 19.1 24.0 12.5 10.9 8.5 11.2 11.5 26.7 28.0 16.9 25.6 20.5 14.2 5.2 16.9 6.6 18.4 21.6 13.7 23.8 24.8 22.9 58.8 55.8 57.4 8.3 13.9 25.3 22.9 23.3 6.2 13.9 4.7 15.7 18.1 13.8 21.1 19.4 57.8 9.9 15.9 24.5 54.4 22.2 41.3 23.8 8.9 6.6 6.1 52.4 12.9 13.8 8.7 Downstream Margin 14.5 6.5 32.7 14.9 26.9 56.4 7.9 14.6 26.1 17.0 24.1 25.6 5.8 53.4 14.1 53.7 6.3 6.2 25.2 23.4 30.8 26.0 25.7 8.4 31.8 16.2 13.6 4.1 7.7 25.2 16.5 7.4 32.4 26.9 53.4 34.9 30.5 Gross Marketing Margin Gross Refiner Margin 53.5 30.2 22.4 14.3 13.7 39.8 29.0 54.3 66.3 42.7 29.9 53.5 10.0 4.7 14.9 54.1 21.2 14.9 21.7 31.8 13.0 26.6 28.0 55.0 20.5 22.4 MJ ERVIN & ASSOCIATES 86 .7 24.7 58.3 58.5 7.0 16.7 7.2 26.5 31.8 15.2 15.3 13.7 18.9 9.8 11.3 57.1 13.0 10.6 25.5 28.4 56.2 27.0 5.6 26.3 56.3 54.2 7.1 22.3 14.3 15.8 14.1 16.2 26.6 52.0 24.9 14.4 33.2 29.6 9.0 9.2 13.5 16.3 26.9 25.0 7.1 9.5 27.9 23.6 21.1 22.6 54.7 14.4 20.5 23.7 14.0 33.2 27.4 29.4 13.6 24.2 24.9 7.2 63.3 15.3 54.9 31.8 23.5 26.0 7.9 56.8 53.5 27.5 33.2 13.3 22.4 14.9 25.0 7.7 19.6 23.9 26.8 21.3 56.6 54.4 24.0 26.3 54.0 24.2 65.1 7.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.2 25.2 6.4 26.2 23.3 13.2 7.0 24.0 24.0 22.7 29.3 13.5 15.2 8.1 23.9 25.7 12.6 25.8 14.1 53.0 16.7 34.2 4.4 58.4 26.0 52.0 13.7 14.8 14.8 28.7 7.2 6.9 55.3 25.9 4.8 55.2 27.4 24.9 55.3 9.5 35.9 23.3 24.7 32.0 16.0 14.4 14.8 33.0 8.3 4.4 31.1 23.0 24.1 16.2 56.Table B: Key Price / Margin History .0 28.4 53.9 22.7 29.7 63.4 55.2 14.5 5.3 17.2 21.5 14.

4 25.0 5.2 14.6 16.0 25.0 27.1 6.0 29.1 11.7 14.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.1 51.5 20.8 27.4 21.3 26.2 7.7 51.0 28.9 4.0 6.8 28.5 14.5 7.3 4.7 24.0 54.4 16.6 10.9 Downstream Margin 12.5 4.3 21.1 Tax Content 26.2 7.6 10.7 53.3 26.5 6.0 26.3 25.1 15.7 16.2 5.7 53.2 9.1 21.1 55.7 26.4 6.1 14.3 21.5 19.5 13.2 14.3 26.5 15.0 14.5 2.4 28.3 12.2 20.6 5.5 5.6 20.0 28.3 53.0 11.9 14.9 12.0 14.5 21.7 18.8 29.4 26.9 27.6 15.3 55.5 7.9 17.1 11.2 4.9 5.6 53.6 4.8 23.5 9.3 26.2 26.6 17.5 54.4 26.3 26.3 23.7 14.4 11.0 28.5 11.1 6.5 28.0 52.5 5.8 4.4 4.1 51.4 26.5 23.9 3.4 15.9 49.9 14.9 49.0 6.3 4.8 6.9 6.5 6.8 50.5 21.7 5.0 24.3 58.0 9.7 25.2 11.1 3.0 6.8 23.8 22.7 52.3 9.7 8.1 24.3 8.2 14.2 20.1 57.2 23.6 15.9 26.9 9.9 12.5 6.7 7.9 29.2 Gross Marketing Margin 4.7 25.0 12.5 3.6 20.2 54.6 11.7 3.3 6.3 26.0 26.8 49.7 24.1 26.4 21.5 17.8 20.3 26.1 14.8 25.3 28.8 17.9 29.1 10.2 27.5 11.6 23.5 21.5 13.4 51.2 26.1 11.3 26.7 5.6 53.7 13.2 12.2 49.4 25.3 28.6 19.5 55.1 61.2 28.7 7.0 28.2 25.1 26.2 7.3 7.2 26.3 27.3 4.4 6.6 12.1 15.9 19.7 53.0 53.9 4.6 4.4 13.8 52.4 26.9 28.0 5.1 14.6 9.1 16.3 9.9 27.3 26.9 58.1 15.1 20.5 3.7 6.4 32.4 6.0 25.1 Gross Refiner Margin 7.1 6.7 6.7 3.2 25.7 12.4 7.1 26.5 53.5 25.1 11.6 3.2 7.9 23.0 12.4 24.7 29.8 28.0 9.7 23.1 6.3 13.2 4.7 15.4 6.7 26.7 13.9 11.2 15.6 21.1 54.8 10.6 27.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .5 19.4 5.3 9.3 54.0 28.0 57.3 7.

661 Canadian Domestic Gasoline Sales (M3) 2.299.3 23.890.580 3.651 2.9 23.499 2.0 24.381 2.621.422.095.218.7 29.613 3.979 3.743 2.833 2.3 23.6 24.254.047 3.354.5 31.3 22.9 22.122 2.1 22.8 28.5 19.456 2.056 3.2 23.9 21.480.287 2.035 2. Inventory.133 3.479 2.687.333.518.644 3.044 2.477.2 23.0 28.026 2.490 3.002.973.250.324 2.682.813 2.9 23.073 2.930.844.047 2.075.930 3.4 31.622.179 3.409.9 26.369 2.620 3.830.781.592 2.000 3.714.7 18.366 2.097 2.7 24.8 26.9 30.473.8 27.883.682 3.5 22.437.095 2.897 2.501.654.311 3.160 3.625 2.853 2.785.865.7 31.693 3.725.458.589 3.9 17.871 2.323 3.771 3.131.626.441.102.180.544 3.735.773.461 3.7 28.037 2.1 16.313 2.752 2.315 2.114 3.1 29.232 3.2 27.677 3.437.202 3.748 2.5 27.429 2.370 2.864 2.8 23.152 2.122.019.822.995.9 26.469 4.831.378.633 2.808.256 2.287 2.732.045 2.291.287.6 23.039.439.739.269 2.220.089.081.889 3.8 21.661 Canada Avg ex tax RUL pump price (¢/l) 39.933 3.4 24.411.254 2.558.029 2.181.729.979 2.744.884 2.970 3.1 23.630.894.966.020 2.193 3.2 26.4 21.403 2.688.5 28.316.646 2.245.142.416 2.051 3.322 2.498.733 2.4 24.7 24.9 19.802 2.325 2.176 3.604 2.430.8 23.8 33.5 30.429 2. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.969 2.508.671.4 21.268 2.666.5 27.108.285 2.839 2.642.633.045 2.085.510 3.299 2.2 27.301.427.521 2.022.799.615 2.932 2.377.9 31.941 2.3 24.516.887.827 3.5 23.101.045.286.2 29.703 2.869 2.235 3.804 3.801.2 26.346.970.188 3.566.3 22.412 2.322 3.647.361.782 3.779 2.572 2.823.767.609.934.900.840.4 22.443 2.765 3.246 2.295.255 3.897 3.322 2.641.180 3.7 26.4 32.672.168 2.748.130 3.369.801.612 3.279 2.070.720 3.297 2.637 3.7 21.164.030.7 34.2 24.389.931 3.587.254.775.335 2.7 29.886 3.938.0 20.968 3.904.193 3.935 3.3 Canada Avg RUL Rack Price (¢/l) 35.475 2.Table C: Canadian Supply.810.8 29.7 29.141 3.112 2.415 2.558.1 23.1 23.321.804 2.301.192.329 3.182 3.9 23.5 32.4 29.897.8 22.6 21.345.202.199 2.565.298 2.067.684 2.998.2 27.141.301 2.141.027 2.709 2.636.2 21.636.880 Canadian Retail Gasoline Sales (M3) 2.262.2 22.120.673 2.209.818.796.502 2.837.379.450 2.976.8 MJ ERVIN & ASSOCIATES 88 .476.600.532.952.201.251.331 2.180 2.3 26.294.015 3.457 2. Demand.841 2.101 2.893.485 2.025.113.462.2 27.270 3.4 25.710.455.709 2.373.9 29.281.083.619 2.011 2.599 2.874 3.798.509 3.564 2.326.970.859 2.876.6 28.878 2.300.003.130 3.070 3.967 2.667 2.843.767.628 3.263.960.6 26.132.873.958.218 3.191 2.281 2.669.161.1 21.853.5 25.151.853 3.2 20.206.242 2.140.8 30.627 2.716.283.338 3.176 2.

614.1 24. demand.336.857.830 3.658.717.597 2.7 Canada Avg RUL Rack Price (¢/l) 20.5 21.519.165.649.505 2.1 21.889.5 21.250.977.644 3.317 2.179.315.692.997 2.606.155 2.346 2.0 26.773.112 3.9 29.8 20.170 Canadian Retail Gasoline Sales (M3) 2.195.799 2.791 3.667 Canadian Domestic Gasoline Sales (M3) 3.516 3.785.649.480 2.714 2.2 26.593.999 3.753 3.840 2.5 source: Statistics Canada (production.825.082.442 2.244 3.7 21.8 24.376.555.936 3.671.620.261.8 25.338 2.324.797.382.4 26.415 2.2 25.5 25.8 28.0 25.7 22.904.005 2. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .4 25.994 3.426.390.906.370.806.8 21.881.184.9 27.198 2.919 2.4 26.796.055 2.344 3.182.170 3.656 3.638 2.675 2.7 19.204.483.961.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.648 3.6 20.320 3.986.965.205 2.9 22.940 2.601 3.149.0 25.214 2.0 24.6 20.264 2.294 3.264 2.660 3.006 3.123.703 3.521 2.037 3.097.607.2 25.414 3.198.386 3.130 3.148.930.198.970.467 2.469.386 3.068.863.363.219 Canada Avg ex tax RUL pump price (¢/l) 27.048.074.0 26.617 2.539.077.679.864 2.871 3.4 20.324 2.669 2.537.984 3.222 2.141 2.566 3.928 3.

4 54.0 58.0 61.9 58.6 47.2 46.2 62.0 61.3 54.8 47.9 45.5 62.9 54.2 62.9 53.9 56.9 53.2 43.5 60.5 57.5 59.5 58.9 64.4 Winnipeg 49.7 65.9 63.7 46.4 56.1 55.5 59.9 53.9 51.9 49.5 56.1 59.5 57.8 57.9 62.5 59.9 56.3 52.4 55.8 47.4 58.2 55.2 46.9 46.2 50.3 49.5 53.4 65.9 54.1 50.5 58.1 49.9 55.5 47.4 55.6 49.6 44.9 50.2 62.8 53.0 62.8 52.2 63.9 58.6 54.9 52.5 51.5 57.3 51.1 50.9 61.9 64.3 50.5 58.5 53.7 65.5 57.8 51.9 61.9 61.2 59.5 61.9 54.0 48.6 54.5 58.9 55.5 58.2 57.8 52.7 53.9 44.9 61.1 53.5 45.4 56.6 56.2 65.0 52.4 56.9 56.5 Vancouver 53.9 53.8 52.9 51.9 58.1 60.5 60.5 57.4 52.9 53.8 48.4 57.Table D: Pump Price History .3 55.2 Nanton Peace River Regina 49.6 55.5 60.5 59.9 47.8 48.4 52.9 56.7 44.5 58.6 47.7 62.1 52.0 46.9 44.0 54.5 51.9 56.4 57.1 52.0 61.9 47.2 46.9 64.9 64.5 58.8 55.9 58.6 46.9 47.5 56.4 56.2 62.5 59.5 59.3 56.2 61.4 50.6 48.0 57.5 59.9 62.1 55.2 54.0 61.4 46.0 59.8 57.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.2 54.2 51.2 47.8 Thompson 59.4 53.8 56.9 56.9 49.6 58.2 56.4 61.5 51.8 50.9 53.1 49.7 49.2 62.1 56.4 59.7 51.4 55.9 55.3 61.6 53.9 52.5 58.5 59.5 57.6 58.7 65.5 58.7 62.9 53.3 62.5 52.6 51.7 48.8 56.4 52.8 56.7 White Rock Calgary 45.8 48.9 MJ ERVIN & ASSOCIATES 90 .2 62.5 47.5 52.9 51.9 56.4 55.3 52.3 52.9 54.1 53.3 52.9 54.9 57.6 50.4 52.5 53.4 53.9 52.4 63.3 42.8 45.9 54.6 47.6 62.9 59.9 54.8 59.7 50.8 56.4 47.7 45.5 57.5 57.2 48.0 61.8 44.4 52.0 50.8 53.0 52.9 58.5 60.8 48.4 48.1 41.9 56.9 59.9 54.5 57.4 54.8 56.0 39.9 53.7 63.2 50.2 51.1 55.7 53.3 48.8 52.0 62.8 64.0 44.1 44.9 53.3 59.0 55.6 46.3 50.5 50.4 58.8 59.5 51.4 46.5 57.3 49.8 50.4 55.7 57.2 58.7 52.4 61.8 54.5 61.3 48.9 53.8 41.1 43.5 54.6 48.6 59.7 65.5 56.4 56.9 61.8 52.4 55.8 53.9 52.6 55.5 45.9 48.6 50.0 Sioux Lookout 62.1 44.2 51.9 56.9 47.2 62.5 55.7 48.5 59.7 57.6 52.4 49.7 54.5 49.8 56.5 60.9 64.6 48.9 55.5 57.2 62.5 51.3 54.4 46.5 57.9 51.5 58.4 53.5 54.5 58.5 55.7 50.7 53.7 45.7 51.9 56.7 51.9 56.8 53.5 58.1 49.0 61.4 54.5 57.5 56.9 52.4 56.0 62.5 46.9 57.2 54.5 60.2 65.4 61.8 49.2 62.3 52.0 59.7 54.7 65.9 49.7 54.7 52.9 53.2 50.9 61.6 53.9 52.5 47.0 61.3 55.9 52.5 56.

7 51.2 Montreal 63.2 58.3 53.6 58.4 57.2 56.5 55.3 59.6 55.3 52.1 54.1 55.0 56.2 55.5 64.8 50.3 55.2 56.6 61.7 55.6 55.5 53.6 54.3 54.2 55.9 55.1 Toronto 52.6 52.8 50.0 54.6 49.7 54.2 56.2 60.5 57.6 59.2 57.8 55.3 52.7 54.0 50.3 59.5 56.4 54.1 54.9 63.0 61.5 54.1 58.6 Canada Avg 55.4 52.0 52.0 58.9 58.1 55.8 61.8 52.0 59.3 58.6 63.0 52.2 57.3 56.1 52.6 53.1 53.2 57.3 55.2 54.0 60.0 47.1 56.2 57.Table D: Pump Price History .5 57.2 51.0 53.3 55.9 57.9 60.5 56.5 56.8 47.7 59.9 55.7 54.5 59.7 56.4 60.1 61.0 49.3 53.8 57.5 54.2 54.1 52.4 54.7 57.0 47.1 58.5 48.5 61.7 50.6 59.6 63.6 56.6 50.6 59.8 55.5 58.1 52.1 57.0 60.5 51.2 57.3 52.2 55.2 51.0 50.2 51.4 57.0 61.1 60.7 54.1 53.1 55.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.5 52.9 49.5 MJ ERVIN & ASSOCIATES 91 .3 54.6 51.0 59.9 49.5 59.2 57.5 61.6 54.8 Halifax Charlottetown 60.0 51.1 53.0 54.1 60.9 49.9 53.4 57.2 50.1 56.2 49.2 49.7 57.6 54.5 51.0 59.9 53.1 54.0 53.5 53.6 61.6 55.3 56.7 46.3 56.8 57.8 55.3 53.6 58.4 54.6 58.1 59.9 60.8 55.5 52.2 54.5 53.7 53.2 61.6 54.1 53.2 54.7 54.2 59.5 51.4 53.2 Chicoutimi Gaspé Saint John 60.9 55.6 54.9 57.0 54.2 55.8 54.7 52.9 56.5 61.4 50.5 57.5 Ottawa 58.6 56.4 53.6 52.8 54.5 63.6 53.6 54.6 52.4 58.0 60.0 53.9 58.8 53.7 51.8 61.7 51.0 57.0 55.0 57.5 60.0 55.9 61.4 54.8 59.2 55.0 54.9 55.0 48.1 54.2 53.0 52.9 64.2 61.9 64.2 56.9 53.8 52.9 55.2 58.3 54.1 61.7 58.1 57.0 55.4 58.5 63.7 51.2 57.1 57.6 60.7 53.8 60.5 64.1 61.4 57.6 49.3 54.4 57.4 57.6 55.4 58.6 56.6 56.1 55.5 52.7 56.1 53.7 48.1 54.9 54.9 51.5 57.7 49.3 56.1 59.6 53.3 59.2 49.4 51.1 55.3 54.9 55.3 53.4 52.5 56.8 55.8 49.5 54.5 56.8 54.9 53.3 55.3 54.4 53.9 55.2 56.8 50.3 61.8 55.0 56.5 54.6 57.9 50.3 54.9 55.6 53.8 49.6 63.2 53.9 61.1 51.5 55.5 55.9 57.5 53.9 56.2 56.8 53.2 56.9 53.9 54.6 52.9 55.6 52.6 51.9 49.7 56.4 58.4 53.3 49.7 44.2 61.4 55.8 55.5 54.3 55.7 59.1 55.2 52.3 56.0 52.8 56.3 57.5 51.2 55.2 57.3 55.9 54.9 61.2 56.2 53.5 63.7 64.4 54.7 47.6 52.2 52.7 57.7 56.6 55.9 62.2 57.9 57.0 57.5 59.9 64.7 52.4 58.7 57.0 55.7 56.0 55.4 51.1 58.6 52.0 52.2 59.3 54.0 48.4 55.0 60.0 57.0 55.8 53.1 51.8 56.5 54.7 54.3 53.4 54.9 55.6 55.8 51.2 57.3 51.7 57.9 61.0 50.4 49.5 57.6 50.0 51.2 60.1 51.0 52.2 54.3 60.7 56.1 58.9 56.6 51.3 54.1 48.3 59.6 58.2 49.7 48.5 52.3 62.5 60.9 61.6 50.4 45.2 58.7 52.8 60.7 60.4 58.5 54.3 52.1 54.6 55.9 56.6 58.3 49.8 54.9 52.7 58.9 60.8 63.6 54.5 67.1 49.8 55.8 57.1 56.4 54.4 51.2 52.4 54.0 56.

9 30.1 Feb-93 29.1 25.9 23.2 26.4 31.5 29.7 26.5 29.7 28.8 29.2 27.9 28.5 Feb-92 28.3 28.6 Mar-93 28.5 Nov-95 30.2 28.0 26.9 30.4 23.5 Oct-92 30.3 31.8 27.4 24.7 Jan-95 27.6 22.8 27.3 29.0 32.0 26.0 31.7 30.7 27.4 30.5 Jul-94 29.4 23.8 31.0 Oct-93 28.0 24.1 28.4 31.0 25.1 31.7 30.4 20.0 23.0 26.2 24.1 25.6 Sep-93 28.6 23.0 23.4 30.8 26.4 22.7 28.2 25.0 Apr-92 30.4 31.7 31.9 24.0 23.7 24.9 24.6 21.5 27.9 27.3 21.0 28.1 25.2 Nov-93 27.9 25.7 30.1 27.7 29.7 Jan-92 31.3 23.1 Apr-95 30.8 26.4 25.8 24.8 26.3 28.2 25.1 20.8 29.6 26.6 Jun-92 32.6 28.6 26.3 24.0 24.5 27.3 28.3 30.6 26.8 25.9 26.3 29.0 23.6 26.3 29.7 Winnipeg extax 27.0 23.2 28.1 24.2 24.8 26.1 22.5 25.4 27.7 29.9 24.6 29.5 29.7 24.7 28.4 20.6 25.4 31.1 30.6 29.3 29.9 25.2 26.5 29.4 26.9 29.1 Apr-94 29.3 29.5 28.9 29.5 Oct-95 30.3 27.2 23.6 May-95 29.0 25.3 23.4 Dec-92 31.9 28.Table E: Ex-tax Pump Price History .9 31.8 27.9 28.2 Apr-93 28.2 Nov-92 31.6 26.8 29.1 24.3 28.1 26.4 29.3 29.0 24.0 27.6 27.7 29.9 24.2 28.6 24.6 23.5 29.4 27.6 30.9 20.4 Mar-92 28.3 27.0 31.3 26.9 26.9 27.9 30.9 21.6 29.8 24.6 22.7 27.5 27.9 Aug-93 30.2 28.6 30.2 29.4 30.4 31.4 MJ ERVIN & ASSOCIATES 92 .2 32.3 32.7 Mar-94 28.4 29.9 Jul-93 28.3 26.8 23.1 26.4 29.1 Mar-95 29.7 28.1 22.1 25.1 23.5 26.7 30.5 27.9 29.6 27.3 33.5 23.3 Dec-95 Edmonton Regina extax extax 27.5 23.2 Dec-94 26.8 Jan-94 25.8 28.9 26.3 30.4 25.9 21.0 21.4 29.3 Jan-93 30.5 Aug-94 28.8 24.1 24.9 27.6 28.2 22.6 27.4 27.8 27.8 28.4 22.4 25.2 29.5 Jul-95 30.7 Sep-94 32.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.1 28.6 23.6 30.3 30.3 30.6 25.4 27.9 23.7 28.2 Jun-94 31.0 25.0 27.1 27.7 25.4 29.3 26.9 25.4 27.6 23.4 20.9 24.4 30.9 28.7 26.4 31.5 Sep-92 29.3 26.5 21.4 25.2 24.8 Feb-94 24.1 31.6 26.8 27.3 24.5 24.8 27.9 25.8 25.4 23.4 29.7 26.0 May-93 29.4 24.6 26.2 24.8 29.4 29.5 24.9 26.6 Aug-95 30.7 29.5 27.3 Jul-92 31.0 Jun-93 26.8 25.6 26.6 29.2 26.6 27.9 Oct-94 32.0 29.4 21.6 24.1 30.4 31.3 29.3 29.3 28.4 Jun-95 30.3 Feb-95 26.7 Aug-92 24.7 30.8 28.0 22.2 Nov-94 29.7 28.4 28.2 26.8 Dec-93 26.4 25.9 27.3 26.8 21.1 19.7 26.8 22.2 27.3 29.5 21.9 25.3 29.4 28.8 Toronto extax 26.0 May-92 28.5 24.4 22.3 May-94 28.8 24.5 26.7 Sep-95 30.4 28.3 24.

4 32.5 27.7 26.0 29.2 28.9 27.8 32.7 28.0 31.9 30.6 28.1 34.6 32.9 30.0 36.3 29.6 25.2 30.7 32.1 24.4 34.4 28.0 29.7 32.6 36.7 24.1 24.6 26.7 23.7 29.6 25.2 27.0 27.1 30.8 23.8 25.5 26.1 34.3 31.7 23.1 Montreal extax 31.8 28.9 28.7 27.7 23.0 34.1 28.6 34.8 27.8 32.9 37.8 26.2 30.5 32.0 26.2 24.9 33.9 31.3 28.6 23.7 26.8 36.2 23.9 32.6 Charlottetown extax 36.5 31.9 24.0 25.0 28.3 31.0 25.2 26.3 25.8 23.6 32.9 23.4 21.5 28.1 29.2 30.8 30.4 32.9 29.5 27.3 25.3 31.6 28.0 33.1 30.6 26.3 28.1 22.3 34.2 26.9 35.9 32.6 23.2 27.1 31.2 26.7 27.2 32.8 25.5 24.9 27.9 33.8 28.6 36.4 31.5 27.4 27.8 32.4 22.0 33.6 34.3 29.0 34.2 27.2 28.8 33.2 33.1 30.5 31.1 32.7 32.3 31.8 30.4 24.9 27.0 36.1 32.2 27.2 34.3 26.5 25.3 28.0 33.0 32.2 25.7 28.0 33.1 34.7 26.2 24.9 29.8 27.8 27.4 25.0 23.2 27.7 26.9 29.8 26.8 25.0 30.3 35.6 32.7 34.8 33.2 22.9 27.5 33.2 27.8 26.6 24.3 27.6 28.9 29.8 28.4 25.7 30.7 34.5 34.5 25.4 36.2 27.3 26.2 25.6 29.8 28.3 34.0 33.7 Quebec extax 32.1 24.5 27.5 26.1 25.5 28.5 36.4 25.6 28.Table E: Ex-tax Pump Price History .7 28.7 26.3 25.3 30.5 30.2 27.1 26.8 30.5 28.3 23.1 28.7 30.0 28.6 33.0 29.7 27.5 30.1 23.0 26.6 29.8 29.2 26.9 26.1 32.5 33.2 28.7 28.2 Saint John Halifax extax extax 34.9 31.9 27.9 30.4 33.2 36.8 27.5 25.8 29.0 34.3 28.4 33.8 26.7 24.8 Canada Avg extax 29.0 30.3 31.5 30.9 30.6 27.4 25.9 26.2 25.7 29.4 33.0 28.6 32.7 25.5 33.6 22.8 28.9 32.8 25.3 25.2 22.1 29.3 27.6 28.5 29.4 24.9 32.4 26.7 27.1 32.0 28.4 31.0 23.6 26.1 29.5 25.7 28.2 26.2 32.3 26.7 24.8 23.0 28.3 29.5 28.9 28.3 22.3 24.6 31.7 26.2 25.4 33.2 21.4 28.9 29.1 26.9 30.7 22.8 23.4 32.2 33.2 36.3 33.7 24.2 32.7 MJ ERVIN & ASSOCIATES 93 .3 34.8 29.4 26.4 36.8 32.4 33.8 29.8 28.5 24.6 31.2 27.0 32.8 29.2 22.6 27.0 26.6 26.6 32.0 25.2 22.7 33.9 29.3 28.3 29.4 31.5 25.2 29.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.6 27.8 24.5 25.9 29.8 26.1 24.4 26.6 33.7 24.9 26.3 29.

8 23.5 24.3 21.5 21.3 20.7 23.2 21.1 23.0 23.7 22.0 22.3 23.0 20.9 25.7 22.5 17.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.2 21.7 22.4 21.5 22.8 18.1 20.2 18.2 18.2 19.6 25.6 23.2 21.0 23.2 16.6 20.6 20.1 20.9 22.7 22.9 17.3 21.8 21.1 24.3 17.4 19.1 19.6 23.0 22.6 19.4 21.3 23.2 18.3 23.6 20.3 17.5 22.2 21.0 21.5 21.4 23.7 21.6 21.7 21.2 20.3 21.3 23.2 Quebec city Montreal rack Toronto rack rack 19.8 20.3 20.5 21.6 18.3 22.5 22.2 23.7 18.6 20.9 18.6 20.8 22.2 20.7 22.8 27.4 22.4 21.7 21.8 20.3 18.5 21.7 17.0 20.1 21.2 22.3 24.1 23.5 22.0 21.7 21.2 16.5 18.0 21.6 20.4 21.9 18.8 24.0 22.4 21.9 23.8 23.9 22.5 21.5 23.1 22.2 18.2 22.1 20.0 22.8 22.1 19.0 22.5 19.4 21.2 16.3 18.3 17.3 20.8 19.4 21.8 20.5 22.4 21.2 20.2 21.7 21.2 23.8 21.3 20.9 21.0 21.9 24.2 22.6 19.3 22.3 19.7 22.2 20.5 24.1 22.1 21.9 21.4 20.2 17.1 20.2 23.1 16.7 21.8 21.4 15.9 21.2 29.0 22.4 17.8 23.2 21.4 22.0 23.3 23.7 22.9 18.1 21.2 18.3 22.0 19.1 21.4 20.9 19.8 22.4 22.0 23.4 22.0 21.7 17.9 21.9 21.5 23.4 22.5 21.6 20.5 20.2 21.8 22.0 24.9 18.3 19.0 19.1 22.3 23.5 17.5 21.5 19.0 23.8 23.9 22.1 21.1 21.7 21.1 22.4 20.3 21.8 21.8 20.6 23.7 22.4 20.4 22.5 21.8 23.8 23.8 18.7 20.3 19.7 17.1 22.6 19.1 20.9 22.7 19.3 18.8 21.7 22.5 24.6 23.7 MJ ERVIN & ASSOCIATES 94 .1 21.0 21.4 24.7 23.5 20.5 23.9 23.9 22.5 18.8 20.8 25.3 26.5 27.1 19.5 20.4 23.4 20.0 23.6 19.6 19.9 20.9 22.1 Halifax rack 20.5 26.1 23.4 21.1 20.1 18.2 20.4 21.8 22.4 23.3 19.5 17.8 18.7 20.1 15.1 20.0 21.1 22.5 22.8 23.6 25.1 15.8 18.8 19.2 23.2 20.9 20.8 19.0 19.6 23.0 23.3 21.9 21.4 21.4 21.2 19.4 22.4 22.0 23.9 20.3 23.6 19.Table F: Rack Prices .2 21.6 21.6 23.8 21.6 25.8 Ottawa rack Thunder Bay rack 20.1 20.7 20.7 19.4 18.8 20.2 19.3 24.4 21.9 22.7 18.6 22.4 22.4 22.7 16.1 22.1 21.5 20.4 22.8 19.4 23.3 22.

8 22.3 24.7 20.5 22.1 24.8 24.3 22.0 18.7 21.0 24.7 21.2 23.8 20.1 23.3 23.0 22.2 22.8 24.1 22.9 22.9 20.8 21.9 19.9 21.1 18.5 21.1 17.0 20.2 Edmonton Rack 23.0 20.7 23.3 20.3 19.5 17.4 21.1 25.1 19.9 20.6 23.9 19.7 23.5 23.1 22.9 22.6 19.1 21.9 23.1 21.5 21.6 21.7 22.1 23.2 20.8 Vancouver Victoria rack rack 24.4 21.8 18.8 23.8 21.0 21.4 24.5 18.5 24.7 22.7 17.1 22.6 23.5 21.5 MJ ERVIN & ASSOCIATES 95 .8 23.5 23.2 24.9 18.1 18.9 21.3 24.2 21.9 21.4 22.9 21.8 23.1 23.7 22.0 18.9 22.5 22.6 22.9 21.3 21.4 21.9 21.0 22.4 25.9 22.7 24.1 21.8 20.9 23.6 23.4 21.3 23.9 24.6 23.8 22.1 23.3 24.9 23.5 23.2 18.4 22.5 23.8 20.1 21.9 21.6 25.7 24.9 24.1 21.5 21.4 20.7 23.0 25.6 24.2 23.3 20.2 22.9 19.9 23.6 23.3 17.5 20.2 20.3 17.1 23.6 23.6 21.1 23.0 17.5 21.2 21.8 20.0 22.7 24.9 22.6 21.1 16.9 19.2 20.4 22.8 19.1 21.5 19.6 21.6 21.2 24.2 24.6 17.1 20.5 21.3 23.6 20.1 23.5 23.0 21.8 21.2 22.1 23.4 19.2 19.2 23.0 21.5 22.6 21.6 20.0 21.2 22.6 22.9 19.2 20.3 20.0 22.0 24.3 22.7 21.3 17.7 22.5 24.3 21.0 24.9 19.0 20.8 22.6 22.5 21.6 21.9 21.7 25.6 17.7 22.2 22.7 21.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.0 22.5 22.4 23.3 23.9 22.2 19.7 21.6 21.5 21.1 22.6 23.0 23.5 Canada avg rack 22.2 22.6 23.1 21.5 19.5 23.2 23.3 22.9 23.4 18.4 21.4 22.6 25.7 21.9 18.4 21.3 20.7 21.4 21.4 22.9 23.2 20.5 24.0 23.7 18.8 21.5 22.9 22.7 21.5 19.9 24.0 22.1 23.8 22.7 25.6 25.2 21.3 21.4 23.8 23.3 19.2 22.8 22.2 21.Table F: Rack Prices .8 24.4 20.5 22.2 23.0 23.1 19.0 22.1 23.1 20.4 24.5 23.6 20.5 20.1 21.7 23.7 22.7 21.4 24.0 21.8 22.6 20.6 21.7 17.2 22.9 22.1 22.3 23.2 24.0 22.0 20.5 20.7 21.7 22.6 19.3 24.6 24.1 20.2 21.6 21.4 21.1 22.1 25.7 22.7 23.4 24.5 20.0 23.7 22.4 23.3 22.2 23.8 25.7 21.5 21.7 21.9 20.4 23.4 19.7 19.9 21.9 22.1 16.6 22.9 17.3 23.7 22.5 19.3 18.3 21.9 19.5 21.2 24.5 24.0 24.3 23.8 20.5 18.0 17.1 25.0 23.

97 51.00 57.19 52.24 61.89 60.50 56.94 55.238 2.448.204.859 240.113 2.997 397.101 256.712 1.45 63.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.72 74.23 53.858.214 248.621 102.483 63.220 389.597 2.00 62.620.194.890 2.211 15.30 63.018 2.702.55 58.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661. Urban.796 2.030.66 50.85 48.704.414 450.32 51.935 758.268 478.03 58.014 3.119 632.10 59.334.20 58.48 56.00 57.20 59.483 2.192 2.30 54. and All Study Markets are weighted (by market population) averages.10 53.40 63.834 71.052 84.636. MJ ERVIN & ASSOCIATES 96 .83 68.90 67.10 63.009 54.249.97 63.30 68.26 49.00 48.17 Diesel 64.36 54.72 63.25 57.196 669.234 799.65 54.246 2.00 67.70 55.420.88 64.985 636.669 203.Table G: Study Market Data .53 61.13 58.000 217.00 66.89 61.141.628 702.30 52.50 55.53 48.508 2.749 243.245 351.90 62.895 600.50 56.400 142.949 1.412 722.40 61.529 123.166 102.060.174.702 333.500 378.830 2.45 53.749 91.120 570.298 576.34 63.377 30.73 65.745.20 61.72 58.145.894 1.40 58.250 748.89 65.614 3.770 2.60 49.832 91.101 447.86 56.23 63.40 59.30 57.971 473.058 2.093.922 103.88 54.018.438 591.000 1.554 2.74 57.28 65.60 70.173 568.056.980 120.102 98.687 1.671 399.643 184.905 183.80 64.903 33.370 41.90 63.18 51.300 578.332 101.810.11 58.897 350.98 59.87 61.549 111.811 120.10 52.972 429.241 451.20 54.07 61.70 49.22 59.35 73.543 2.698 Note: Regional.686 273.678.513 19.557.92 51.150 48.19 49.000 63.30 66.516.85 54.30 54.460 833.153 316.296 179.945.796 529.02 51.26 44.20 60.790 185.625 64.60 50.93 63.837 329.16 59.983 1.26 63.60 60.850 126.475 1.933 25.38 56.000 1.40 54.42 53.78 67.

33 21.13 23.42 27.90 26.83 24.33 22.63 25.50 25.59 24.45 20.33 22.27 20.81 25.41 22.18 28.43 20. MJ ERVIN & ASSOCIATES 97 .42 24.35 25.78 Product taxes Midgrade Regular 26.84 28.27 29.18 25.Table H: Study Market Data .03 21.88 28.36 24.06 28.81 28.17 20.83 24.08 25.63 28.50 20.39 21.03 20.45 24.96 22.93 23.75 22.45 28.11 26. Tax (by Grade) Rack Pt.09 24.33 21.97 22.23 25.23 26.96 24.45 24.95 22.31 22.07 24.38 24.26 27.83 22.16 21.92 30.98 28.69 27.88 28.59 22.45 20.37 27.33 27.99 28.89 29.98 25.51 25.15 24.73 26.82 28.45 23.Rack Price.28 23.89 25.92 22.65 26.65 27.45 25.34 25.01 22.54 28.40 25. Urban.89 26.45 22.88 22.88 22.85 28.95 Premium 26.74 21.25 31.39 Note: Regional.20 27.51 31.96 24.28 22.03 24.08 23.63 24.47 28.39 22.49 21.20 20.43 21.81 27.76 25.04 24.99 26.33 21.51 25.43 28.81 21.68 Diesel 36.40 27.23 24.75 27.49 21.39 21.97 23.07 24.04 26.87 26.32 21.83 23.45 20.33 21.42 24.36 26.49 31.73 32.42 25.07 26.57 22.69 23.43 21.21 27.01 28.47 20.45 29.84 28.34 26.32 33.95 25.45 20.33 22.30 29.26 28.90 27.55 28.25 28.48 25.95 22.59 28.02 23.92 20. and All Study Markets are weighted (by market population) averages.63 21.34 20.76 24.65 21.59 28.16 29.97 25.15 20.15 29.23 23.09 27.58 25.55 28.43 20.64 28.82 21.63 20.83 24.59 28.45 29.47 27.38 24.93 27. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.88 20.89 28.41 27.07 26.92 21.25 27.93 23.39 22.59 22.49 25.15 27.51 20.94 23.16 22.21 27.88 20.53 23.07 24.83 25.63 26.25 24.56 22.91 21.57 29.33 21.

62 56.85 11.91 2.85 24.49 2.31 0.98 0.83 1.Blended Prices.33 9.43 23.11 26.44 25.97 0.81 26.30 5.77 37.93 22.45 1.31 23.89 0.60 23.16 20.14 60.73 22.31 34.28 56.98 1.12 23.78 2.38 22.57 12. MJ ERVIN & ASSOCIATES 98 .24 7.79 0.96 3.27 60.68 7.06 28.83 27.83 36.00 4.91 29.64 3.38 7.26 27.75 23.95 6.95 21.88 31.02 13.85 26.13 11.27 6.89 21.06 0.60 7.50 3.38 2.17 11.18 7.28 1.50 10.56 24.63 60.29 24.26 5.71 33.96 25.34 0.68 7.44 56.10 6.82 3.07 30.88 5.22 14.00 22.23 7.10 3.47 58.80 9.84 5.77 5.58 1.58 66.29 8.80 1.63 58.21 8.94 17.34 1.03 7.98 31.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.29 7.20 14.27 11.36 20.02 3.73 10.19 5.(∑x)2 ]/n2.12 6. Urban.90 59.04 28.41 29.75 28.89 28.51 11.52 30.04 0.94 22.25 1.033 0.08 17.64 1.90 23. and All Study Markets are weighted (by market population) averages.02 22.50 0.01 0.70 22.99 0.59 4.27 62.06 5.24 23.99 2. Average Deviation is the average deviation of the market values from their mean (average) value.39 56.35 27.20 5.92 22.73 2.07 0.94 Note: Regional.05 6.36 0.64 3.17 9.84 28.31 28.04 23.91 22.98 0.16 3.14 7.28 27.50 58.35 58. Costs.08 3.07 0.72 26.17 26.41 7.47 0.73 1.86 28.21 8.38 28.83 12.33 .96 27.08 55.79 33.22 5.83 21.44 33.53 6.91 0.49 57.38 0.00 58.26 3.54 50.00 0.17 1.28 1.04 22.77 30.01 31.68 2.52 5.16 54.08 0.22 1.18 21.53 21.45 6.93 56.03 28.43 0.11 31.21 24.23 38.48 7.24 7.56 4.81 28.82 32.85 21.35 28.30 12.76 5.41 12.64 2.Table J: Study Market Data .86 49.13 28.13 0.18 55.96 28.15 66.53 22.66 28. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.32 31.82 95 Retail Gross Product Margin 6. Variance uses the formula [n∑x2 .37 26.35 60.42 2.60 14.02 0.

956) $ 200. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.367) $ (164.074 $ 131.855 $ 278.250.626 $ 81.900 2.766) $ (274.144 2. these averages are based on all applicable study markets.572) $ (286.209 $ 26. MJ ERVIN & ASSOCIATES 99 .Sales.481 $ 96.066 3.871) $ (128.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.068 3.677 $ 180.265.223.241) $ (227.948 3.000 $ 156.779 $ 121.805.716 Note: Regional.244 95 net retail Ancillary Revenue petroleum revenue $ 208.719 3.622 $ 174. Revenue.081 $ 222.913 $ 139.780 $ 85.010 1.885.032 $ 77.632 $ 256.890.478 4.465.510 $ 60.707 $ 260.208) $ (226.089. Urban.289 981.794 3.630 3. and consolidated outlet income these averages are based only on those markets with available data.098.247 4. outlet costs.550 694.332) $ (238.542 $ 222.000) $ (241.772.688 $ 85.071.502 $ (80) $ 60.993 $ 113.564 $ 252.557) $ 102.623 2.067 $ 92.837 $ 56.011.023 $ (15.143) $ (249.014.295 $ 174.197.934 3.638 2.995 $ 234.157.966 3.224 $ 189.604.217 2.129 $ 97.135 $ 199.095.000 2.117 $ 207.246 $ 118.375) $ (49.013 $ 227.646) $ (98. For 95 net retail petroleum revenue.900 $ 179. but for ancillary revenue.102 $ 223.875 $ 255.279 $ 154.750 $ 271.098 $ (320.827.272 $ 118.394.658.550 $ 177.520 5.648 3.852) $ 119.542.866) $ (244.302 $ 69.544 $ 175.209 $ 82.058.800 $ 225.120 $ 54.429 $ 238.746 $ (374.526 $ 207.263 $ 60.467 $ 96. and All Study Markets are weighted (by market population) averages. Outlet Costs.856 3.Table K: Study Market Data .272 $ 210.694 3.911) $ (166.640 4.004.

60 3.275.Demographic Profiles Population pop’n 299 .73 14.014 5.60 11 7.52 13 5. rank* 3.775 678.89 2 4.223 3.42 5 14.550 1.058 1.21 0.88 11 8.250 981 2.29 8 7.745 16.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.90 13 4.157 2.06 5.98 6.55 19 11.02 0.089 3.06 1 5.43 12.20 17 14.604 3.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.96 5.33 0.36 5.24 0.13 2 11.30 0.95 3 9.23 6 7.51 9 11.76 18 5.04 15 4.29 1.45 14.098 4.Table L: Study Market Data . inverse ranking is used (lowest value = 1).47 7.394 2.50 8.004 3.23 8 31.10 3.48 7 7.17 19 9.400 74. N refers to study sample size (total = 481).97 8.715 14.20 0.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10. MJ ERVIN & ASSOCIATES 100 .08 16 3.06 16 4.071 2.50 3 10.310 1.41 0.01 7 2.675 179.585 6.41 1.08 4 2.91 12.98 7.27 1.54 6 2.870 120.465 694 3.30 1.53 10 6.79 6.91 17 4.180 616.40 1 3.605 16.00 11.145 81.975 2.40 9 4.827 3.50 9.45 0.845 15.47 14 3.775.542. of Outlets No.315 710.265 2.89 7.27 0.80 10 4. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.970 330.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.84 12 5.22 3.790 1.095 3.38 0.88 12 7.22 0.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.000 pop’n No.475 3. of Brands No.28 17.85 15 11.73 5 10. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.08 3.658 3.68 4 7.

a series of studies whose goal is to strengthen Canada’s competitiveness.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Ervin. accessible through a public fax-back dial-in system. Ottawa ON. bulk. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. Petroleum Products Address: 235 Queen Street. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . aviation and lubricants marketing channels. generate jobs and growth. and provide background resources to industry public affairs managers and the media. Vice President Public Affairs Address: 275 Slater Street. Senior Advisor. and in doing so.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Contact: Michael J. Ottawa ON. Ottawa ON. The SCF is the basis for this study. Contact: Maureen Monaghan Address: 580 Booth Street. Principal Address: #400. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. They maintain a large database of historical prices at most major centres. safety and business issues. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). They work with major oil companies in benchmarking performance in the retail. 119 . Contact: Brendan Hawley. cardlock.14th Street NW Calgary AB. Contact: Cindy Christopher. health.

Octane is published quarterly.6th Ave. SW Calgary. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Executive Director Address: 214.Octane Magazine Octane is Canada’s refining and marketing trade journal. Supervisor.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Its monthly publication “Refined Petroleum Products” (cat. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Contact: Len Bradley. Energy Section Address: Statistics Canada. 311 . 101 . Contact: Gerard O’Connor.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. no 45-004) is a useful source of supply and demand volume data. Calgary AB. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation.6th Avenue. Managing Editor Address: Suite 2450.ab. Ottawa ON. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . and is a useful “window” on this industry. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. Contact: Robert Curran.

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